David Dodd 1:48 a.m., May 18
Fed Comes to Market's Rescue
As expected (but in an unusual way), the Federal Reserve came to Wall Street's rescue today (Aug. 9). After the stock market chaos of the last several weeks, observers had expected the central bank to pump in liquidity to buoy the market.
But Wall Street had expected QEIII, or a third round of quantitative easing (the Fed buying bonds to lower long term rates.) Instead, the Fed did an unprecedented thing: it said it would hold interest rates at very low levels at least through mid-2013. The market initially gulped and dropped.
Then the Dow Jones Industrial Average zoomed more than 600 points in less than an hour and a half, finishing the day up 429.92 points or around 4%. Pros realized the Fed had provided QEIII without saying so. (QEII pumped up stocks, but didn't help the economy at all.)
There is another side to this coin that the public may never realize. Since Ben Bernanke, Fed chairman, has stressed that he will keep short term interest rates (now 0% to 0.25%) low as long as unemployment remains high, the Fed is telling the world that U.S. unemployment will remain extremely high until mid-2013. This is exactly what Wall Street wants; it would rather have zero interest rates than lower unemployment. Once again, Wall Street gains from Main Street's pain.