Dr. Bernanke Turns Into Dr. No

Defying worried investors, the Federal Reserve stands pat.

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Investors wanted a bailout of Lehman. Ben Bernanke (and Hank Paulson) said "No." Investors wanted, or at least expected, an interest rate cut. The Fed chairman said "No" again. Now, while it may seem like Bernanke has been reading too much Andrew Mellon lately—the treasury secretary who favored a financial bloodletting at the start of what became the Great Depression as a way of purging the "rot" from the system—what he is really doing is playing the cards dealt him the best way he knows how. There is zero indication that a rate cut would have done much good. As economist Mike Darda writes this afternoon:

The Fed decided to buck market expectations (which were pricing in more than an 80% probability of a 25 bps rate cut) and stood pat with short rates at 2%.... [We] believe the Fed is correct to try to deal with current credit strains with its special liquidity facilities and the discount window rather than to run short rates down from an already low 2%. The financial system is suffering at the hands of a solvency crisis, which is creating a contraction in credit and a breakdown in financial intermediation. Cutting short rates from the 2% level won't solve this problem.

Me: I just noticed the Dow is up more than 100 points. Mr. Market is calling this one right.

interest rates
Federal Reserve
Bernanke, Ben

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