The Federal Reserve Board Losing Control

There is the behind scenes manipulation, deciphering what the Federal Reserve Board Chairman says and trying to read between the lines. Wall Street has been trying to figure out the Federal Reserve Board for decades. The actions and words of the Federal Reserve Board yield a great deal of power over the markets.

Last week’s Federal Reserve Board meeting was highly anticipated. Wall Street felt strongly that the Federal Reserve Board would come to the rescue and greatly reduce both the discount rate and the federal funds rate. It would be a signal to the Street that the Federal Reserve Board acknowledges the risk in the credit markets and will do whatever necessary to help stabilize the markets.

Unfortunately, it didn’t quite turn out that way. The Fed lowered interest rates minimally and the stock market sold off. There was nothing stated that gave the markets any confidence that the Federal Reserve Board was on the job.

Then the next day, the Federal Reserve Board made a surprise move. Of course, they do so before the opening bell. They take a step back and put together this enormous coordinated global effort to provide liquidity for the banking system. The markets soared on that news.

Why didn’t the Fed just mention it following the Fed meeting? It was almost like they were back-pedaling after witnessing the markets’ reaction to their interest rate decision. It looks like they are losing control of the markets. It also looks like the markets are losing confidence in the Fed. If you look at all of these Federal Reserve Actions of pumping money into the markets and lowering discount and federal funds rates, the market has done nothing but go down.

Confidence is the last hope for this market. Confidence will prevent recession and a bear market. Unfortunately, it appears that confidence is slowly diminishing.

As you evaluate your investments for the new year, consider some of these risks. These are looking like very big risks.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.