Fed Bails Out the World?
On Wednesday morning the Federal Reserve announced a coordinated action with five other central banks—the Bank of Japan, the Bank of England, the Bank of Canada, the European Central Bank and the Swiss National Bank.
The banks lowered rates on dollar swaps by 50 basis points, in effect boosting global liquidity.
Markets across the globe reacted strongly. Dow Jones Industrial Average futures jumped over 250 points while commodity futures followed suit.
Gold spiked to $1734 an ounce while crude oil moved past $100 a barrel.
The Fed commented on the move, stating "at present, there is no need to offer liquidity in non-domestic currencies other than the US dollar."
Additionally, the Fed added that it was willing to provide further liquidity to US financial institutions should the need arise. This comes just a day after Standard & Poor's downgraded the credit rating of most major US financial institutions.
Is this move likely to spur a sustained rally, or is it just a sign of how bad things have become?
It may demonstrate that central banks around the world will do whatever is necessary to keep the financial system going. At the same time, however, it may indicate that the financial system is in a direr situation that was previously believed.
