In short, U.S. was in a state of financial turmoil, eventually calling for the injections of funds to save the dried-up market as a result of the liquidity crunch (credit squeezing by banks not willing to give out loans) to which the Federal Reserve did pump in. The credit squeeze spread globally, requiring other major central bankers to follow suit.
All these led to a slump in the share markets, globally.
Simply put, the United States is now terminally sick, suffering from fundamental economic problems. Loosening monetary policy ( increase in the benchmark rate) would help towards solving the woes on a long-term basis.
But, just like a patient in critical condition, a strong medication ( in this case, an increase in rate) would kill off the patient outright.
Rather than taking a drastic measure to lift the States out of the economic dilemma (by increasing the benchmark rate), a rate cut would soothe the acute situation in short term.
A cut in discount rate by the Federal Reserve on August 17 paved the way for a decrease in the benchmark rate when FOMC meets again next month. Ben Bernake did the right policy making decision absolutely.
A rate cut has never been favoured by the Fed, but the critical condition compelled the decision - making committee to resort to a temporary soothing measure.
The present deep-seated economic trauma is far from over. If you are a player, continue to track greenback, yen and gold.
Globally, the United States is still ranked no. one. Just look at the recent vibrations that it brought to the whole world - and you would agree with me.
Uncle Sam just e-mailed me with a sigh of relief. I wish him all the best!
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