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Will the Fed avert a recession and other questions

Filed in archive markets by leon on January 23, 2008

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After the Monday Massacre of global stock marketslinks, Asian markets have rallied and the Australian market ended its losing streak with the biggest one day gain since last August after the Fed's surprising rate cut.

So the Fed has stopped, at least for now, a global rout but fears of a recession are continuing to mount. Certainly, the US economy is showing some signs of recession with stock prices slipping, long-term interest rates dropping below the level of short-term rates, housing construction falling and unemployment up sharply. And the Fed is coming under for being behind the eight ball and twiddling its thumbs while the US economy was going down the toilet. And the Fed's aggressive move is implicitly admitting that it had let things go for too long and is now trying to catch up. "I think the Fed definitely has lost a decent amount of credibility...they have been behind the curve and reacted to the market and that doesn't engender a lot of confidence," Greg Peters, head of credit strategy at Morgan Stanley told The Wall Street Journal.

So will the Fed avert a recession? And what are some of the questions that still need to be answered?

Morgan Stanley Asia chairman Stephen Roach says that the rate cut won't fix the imbalance between supply and demand in the US property market and that it won't fix the credit markets. "In essence, the Fed is "pushing on a string" here - unable to stop the recessionary dynamic now unfolding. But there will be consequences in the next recovery. Unfortunately, the US central bank can't seem to break out of the market-friendly trap it fell into nearly a decade ago Panicking over the possibility that yet another bubble is bursting, the Fed is once again injecting liquidity into an asset-dependent US economy. That won't arrest the recessionary dynamic now unfolding but it could well set the stage for the next asset bubble in America's bubble-prone economy. Have we learned anything from the mess of the past seven years?"

New York University professor of economics and international business Nouriel Roubini warns that the rest of the world can't decouple from the US and that there is no way the Fed can head off a recession. As predicted here at the beginning of the year 2008 will be ugly bearish for US and global equity markets.

And there are questions that still need to be answered. How deep is the link between the market downturn and the real economy in the US, and the rest of the world? To what extent can the rest of the world be quarantined from US economic woes? And how far will the credit cancer spread?

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Tags: Federal  reserve  rate  cut  stock  markets  questions  avert+recession 

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