The Federal Reserve were busy this week, first cutting interest rates by .25% on Tuesday..
The Federal Reserve were busy this week, first cutting interest rates by .25% on Tuesday, and then proceeding to announce a novel approach to injecting money into the banking system, as it struggles to combat the severe credit crunch that threatens to drag the country into recession.
The Fed said it would conduct two auctions next week where banks can bid for up to $40 billion in loans, money to be used to bolster their own reserves. It marked the Fed's biggest concentrated effort to inject liquidity into the banking system since the September 11th, 2001 terrorist attacks.
The hope is that the extra funds will spur increased lending on the part of the banks, and make loans a little easier to obtain for many businesses and consumers.
The announcement initially lifted spirits on Wall Street. However, stocks could not hold on to most of those gains, as investors began to worry that the Fed's new auction plan wouldn't be enough to deal with the worsening credit situation.
That performance followed a huge 294-point drop in the Dow on Tuesday, as investors expressed disappointment at what they viewed as a timid interest rate cut by the Fed. The central bank trimmed its federal funds rate (the interest that banks charge each other) by a quarter-point. It was the third cut since September, but many investors had been hoping for a bolder move on the part of the Fed.
The Fed linked the new auction process to an announcement that it was extending a line of credit in dollars to the European Central Bank and the national bank of Switzerland, so that those institutions could better deal with credit problems in Europe. The Fed said it was also coordinating with the central banks of England and Canada.
The efforts are seeking to restore confidence that the Fed, and the monetary authorities in other countries, are doing enough to deal with the spreading global credit crisis.
What does all this mean to the average trader? Well other than the volatility that is constant, and the range bound trading that has plagued the indexes, not much says BetOnMarkets.com’s Michael Wright.
With BetOnMarkets.com you can take advantage of this volatility in the market by buying a ‘up or down’ option, which will compensate the trader if the market hits either of the triggers, which are set above or below the current spot price.
An ‘up or down’ option on the SP500, with 46 points away from the spot both ways, and 18 days to maturity, pays 10% ROI if S&P500 Index touches or trades through either 1440 or 1532.
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Combating Credit Cracks to Save Country From Recession Threat
