Another rate cut is required but how much is enough?



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Jan 28 2008
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It’s almost definite that the U.S. Federal Reserve will cut the interest rate again when they meet Tuesday and Wednesday – that’s tomorrow. Ben Bernanke and his boys could have pressed the panic button a week ago by cutting the rate by 75 basis points but it could be a strategy to gauge the reaction of investors as well. Whatever the intention was, the writing is on the wall – either the investors believe the cut was not enough or they saw it as a confirmation that recession was real.

I’ve mentioned that the Dow Jones’ performance on the day the 0.75% cut was announced speaks volume. Based on Wall Street reaction, the markets are still bearish and in such time there’s only one thing the Feds can do – cut the rate again. The expectation is already there and it would be suicide if Feds were to decide otherwise. But would another round of interest rate cut bring back all the happy investors? Already some said the major sell-off has not even begin while some think even with another rate cut tomorrow, it won’t help. Maybe the Feds could try another 50 basis points.
bernanke to cut rate againAsian stock markets already in a very bearish mood as can be seen today. Even the mighty China’s benchmark index (Shanghai Composite Index) plummeted 7.2 percent to its lowest point in six months. Shanghai stocks collapsed (finally?) with losers outnumbered gainers a whopping 700 to 49 while the little brother Shenzhen Composite Index plunged 6.85 percent. Who said China is invulnerable when U.S. sneezes? Get real, China is floating because the U.S. is absorbing majority of its export. U.S. is still the biggest consumer and that’s a fact.

However if your local stock exchange allows short-selling (stocks or options) such a panic scenario would definitely benefits your pocket otherwise you have no other choice but to wait for a clearer direction before you long the stocks. Of course nobody knows when the bottom is but if you’re adventurous enough, you could try to catch the falling knife.

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