Mad Money

The Fed Blinks


Cramer called it two weeks ago: The Federal Reserve had to open the discount window to remedy the credit crunch that was wracking the markets.

The Fed Blinks, Pt. 1

His now-famous plea on Stop Trading! Aug. 3 was met with cheers and jeers, but in the end Cramer was right. Today, the Fed cut the discount rate by 50 basis points to 5.75%.

“This is about a change in psychology, not fundamentals,” Cramer said. “The ‘pyschologicals’ at turning points like right now matter much more than the fundamentals.”

Just for the sake of clarification, the discount rate is the interest amount at which banks can borrow money from the Federal Reserve. The Fed Funds Rate is the nominal rate at which banks can lend to each other. (Banks, in the end, can negotiate lending rates among themselves. But the Fed has ways to enforce its recommendation, namely the buying and selling of bonds.) This is the rate the Federal Open Markets Committee sets at its eight meetings throughout the year.

The Fed Blinks, Pt. 2

So with access to cheaper money, there’s more liquidity in the market. Cramer said that after a weekend to think things over analysts should return to work on Monday ready to reiterate stock buys, which would push the market higher.

Now, Cramer didn’t get the rally he expected. But that’s because a lot of funds are stilling in sell mode, he said. So when the market went up this morning, that was a chance for a lot of people to take profits. Not to mention, there was still an atmosphere of fear left over from before the rate cut.

But just think of where the market would be if that rate cut never came. Cramer said there could have been as much as a 1,000-point drop.

So now the “safety first” strategy he’d been calling for can be left behind for capital appreciation.

“With this discount rate cut,” Cramer said, “opportunity has come back to the market.”

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