A huge sell off on Friday led
global markets send indexes to their lowest levels in more than fie
years with believe that economy is near recession. Trading was
dramatic as Dow Jones industrial fell more 500 point in early
trading, before ending the day with 300 point loss.
It is becoming more and more clear that economy is
headed for recession even though government is trying to revive
credit markets by bailout packages in hopes that lending
institutions will return to normal banking operations.
On Wednesday Fed is expected to cut the key federal
funds rate another half point, to one percent. Then on Thursday, GDP
data for the third quarter is expected to show the US economy
contracted for the first time in seven years.
These two events will determine if we are in recession
or not. As of right now markets are already factoring these two
events.
Even though Fed has lowered key interest rate to 1
percent before, it may be the first time for Fed to take it even
lower. Fed may not have a choice but to cut.
The problem may be beyond cutting rates as Fed.
Chairman Ben Bernanke endorsed yet another fiscal stimulus plan
Tuesday. There might be signals as Fed has done everything
they could do.
Consumers are also staying away from major purchases,
as if they do not need certain things, they can wait until later.
However, not matter how market will continue moving, what Fed will
do and what the next stimulus package will bring, consumers may not
spend. The key point in consumption side is housing recovery,
and consumers now know that market problems are becoming their
problems as well.
Financial markets around the world expect central
banks to slash rates. Central banks are pressing banks to start
lending, and that is helping a little.
The U.S. government is injecting $7.7 billion to PNC
Financial Services with buy out of the preferred shares. A list of
about 20 banks to receive capital injections in the next round will
be announced
.
The injections are designed to boost banks to start
lending again which have fallen sharply as the housing downturn and
subprime mortgage crippled the market.
Treasury Department now aims at insurance companies
and how it could help them under the $700 billion package. The
bailout package was initially meant for financial institutions and
restore credit markets, however; insurance companies may be the next
problem for U.S. economy.
Just like previously when Fed injected cash to banks
directly by buying their stocks, with insurance companies there is
no federal regulator, but it is regulated by states, some companies
may qualify for aid because their parent holding companies operate
under a federal charter.
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