Emergency rate cut revives talk of
An emergency U.S. interest rate cut last week rekindled perceptions the Federal Reserve has a bias to protect the stock market, and a French bank trading scandal has made matters worse.
Deep losses in stock markets around the world last Monday spurred the U.S. central bank into making its biggest rate cut in more than 23 years on Tuesday, but the stocks drop came as 144-year-old Societe Generale (SOGN.PA: Quote, Profile, Research) unwound positions taken by a rogue trader.
“Disclosures that unwinding of rogue trades also contributed to the weekend meltdown have nurtured perceptions that a new ‘Bernanke put’ has appeared,” Morgan Stanley economists Richard Berner and David Greenlaw wrote on Friday, referring to Ben Bernanke, the chairman of the central bank.
The idea of a put reflects concerns that the rate cut shielded investors from a stock sell-off in the same way traders use a “put” option to limit losses on a security.
Former Fed Chairman Alan Greenspan faced long-standing criticism that he pursued a policy of protecting markets, a view that became popular after the central bank cut interest rates sharply in the wake of the collapse of Long Term Capital Management in 1998.
Critics fear that a similar impression of the Bernanke-led Fed could be a costly one to correct, and might mean higher interest rates in the future than would otherwise be required fast cash advance loan.
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The Fed slashed benchmark interest rates by three-quarters of a percentage point to 3.5 percent on Tuesday before the open of U.S. stock markets, which had been closed for a holiday on Monday. At that time, U.S. stock futures were indicating Wall Street would follow overseas markets in a steep plunge.