the visible hand

it is the theory which decides what can be observed – einstein

stocks surge 500 points — economist lifts wizard’s curtain

Posted by ecoshift on August 17, 2007

Between the last hour of trading yesterday and the first hour of trading today stocks surged up over 540 points. Yesterday’s end-of-the-day rally was truly impressive based as it was on no discernible good news whatsoever. The Fed announced its adjustment to the discount interest rate this morning. Think anyone knew of the Fed decision yesterday afternoon?

Business and Financial News – New York Times
U.S. stocks surge after Fed rate move
Relief rally loses some steam as credit-related concerns linger
By Kate Gibson, MarketWatch
Last Update: 11:37 AM ET Aug 17, 2007

NEW YORK (MarketWatch) — U.S. stocks remained higher Friday but significantly pared gains as investors mulled the impact of the Federal Reserve’s move to cut its discount interest rate in an attempt to ease concerns over liquidity.

“This morning’s move by the Fed is largely symbolic and suggests the Fed is willing to act in the event conditions in the financial markets deteriorate further, but we’re far from being out of the woods,” said Mike Malone, trading analyst at Cowen & Co.

After rallying 321 points, the Dow Jones Industrial Average ($INDU) was up 135 points, or 1%, to 12,980.6, with 23 of its components ahead.

Economics Blog : ‘Lifting the Wizard’s Curtain’
August 17, 2007, 10:31 am
Economists React: ‘Lifting the Wizard’s Curtain’

Economists weigh in on the Fed’s surprise decision to cut its discount rate to 5.75%, while leaving the more important federal funds rate unchanged.
# At the risk of lifting the wizard’s curtain and ruining this gesture, I need to point out that a cut in the discount rate is not an ease, and in fact from the standpoint of mechanics is barely relevant, as borrowing at the window was minimal through Wednesday. The Fed is no doubt hoping to capitalize on the past. Prior to 2003, when the discount rate was lower than the funds rate, cutting the discount rate was the most powerful tool in the monetary policy toolbelt. Indeed, prior to 1994, when the Fed began announcing changes in the funds rate target, a discount rate move was the ONLY move that was explicitly announced. Many market participants will think of the discount rate cut in those terms, which is not the correct way to consider it. Instead, this should be thought of as another (indeed, probably the last) intermediate step short of an ease. –Stephen Stanley, RBS Greenwich Capital


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