August 21, 2007
The Fed's Friday Action
I have read with much interest the financial news's explanation of the Fed's Friday morning decision to reduce the discount rate. What is missing in the explanations if a description of why the market on Thursday, after twice bottoming out at a minus 300 plus points on the Dow, came back at the end of the day to finish more or less even. What caused the market to spike upward on the close? And why did the Fed act regardless of the final upward spike on Friday morning? Rush Limbaugh claims that his program (and a caller stating that it was now "time to buy" just after lunch) drove the market back up. I doubt it. The most obvious explanation is that the problems in the money market caught the Fed's attention and officials at the Fed began making phone calls to check things out. The phone calls and other discussions perhaps tipped some in the market off that the Friday morning action was coming and those traders with well grounded suspicions drove prices up. How does the Fed get critical information without tipping some in the market. Even an increased frequency of focused Fed calls (on the money market condition, for example) would do it. I am on the outside looking in, but Thursday sharp upward spike at the close looks suspicious and merits investigation.
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