Bernanke Hits the Panic Button

It feels a long time ago right now, but if I recall correctly, Ben Bernanke was talking in a generally positive way at the end of last week about the effects of a well-targeted fiscal stimulus. Well, so much for that. Right now is clearly no time for the kind of action which will take two or three quarters to kick in, it would seem: Bernanke has now decided to try to place himself ahead of the curve by slashing both the Fed funds rate and the discount rate by 75bp between meetings.

Does this mean that all the talk of "Helicopter Ben" and the "Bernanke put" was justified all along? Well, yes. And the statement is a little disingenuous, I think:

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

There's nothing in there to justify a huge rate cut in the week before a regularly-scheduled meeting. Tighter credit for some households? Come on. There's one reason and one reason only that the Fed took this move, and it's the plunge in global stock markets on Monday, along with indications that the US markets were set to follow suit.

Now the Fed is charged with keeping employment high and inflation low; it's not charged with protecting the capital of investors in the stock market. So this action smells a bit like panic to me, and it might also have prevented the kind of stomach-lurching selling which could conceivably have marked a market bottom. I have to say I don't like it.