Fed Cuts to Zero. Now What?

We've hit a record low. The federal funds rate is now at "near zero," the Wall Street Journal and Financial Times both blare, leading off their business coverage this morning with the historic cut by the Fed on Tuesday. And the Fed is not finished there. The discount rate was also cut to half a percentage point, a level last seen in the 1940s, and the central bank said it would greatly expand lending, a plan that includes buying up unsavory mortgage-backed securities and U.S. Treasury securities. In a bluntly worded statement, the Fed said it would use “all available tools to promote the resumption of sustainable growth and to preserve price stability," the FT reports.

The New York Times points out that cutting the benchmark rate to between zero and .25 percent is largely a symbolic move. "The funds rate, which affects what banks charge for lending their reserves to each other, had already fallen to nearly zero in recent days because banks have been so reluctant to do business," the newspaper writes. Much more significant is the Fed's pledge to "print as much money as necessary to revive the frozen credit markets." The Fed's historic cut gives it little room for maneuver in the future. Even President-elect Barack Obama sounded a bit uneasy, admitting that "we're out of traditional ammunition that's used in a recession." Still, Obama is plotting a stimulus package that could carry a price tag of $1 trillion.

Of course, all this talk of the "government's got your back" sent markets soaring. The Dow finished up 4.2 percent on Tuesday and Treasury bonds also rallied following the Fed cut. Investors quickly shrugged off news of the worst drop in consumer prices since, as MarketWatch puts it, "the darkest days of the Great Depression," and housing started plunging yet again in November. 

For the lengthy list of duped Bernard Madoff clients who are reading, the Securities and Exchange Commission has something to say to you: We're sorry. According to the NYT, the SEC admitted it "missed repeated opportunities to discover what may be the largest financial fraud in history." In fact, solid leads on Madoff's alleged malfeasance were reported to the agency nine years ago but were not, apparently, pursued. "I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them," SEC Chairman Christopher Cox was quoted in the NYT.

In Europe, they are still adding up the potential losses. European investors' exposure to the alleged Madoff fraud is calculated so far to be in the billions, including a potential loss of 10 million euros, a relatively small sum indeed, for Société Générale. Incredibly, SocGen suspected Madoff of dodgy transactions back in 2003 but kept the details to itself, which is common, the Times writes, in the "secretive world of wealth management." Let's get this straight: The bank suspects shady dealings in 2003 and is on the hook for 10 million today. Maybe it was too secretive.

Back to the investigation, the WSJ says the SEC may have uncovered the problem—at least one member of the agency may have had a relationship that was a bit too cozy with Madoff's niece. "The review will include whether relationships between SEC officials and Mr. Madoff or his family members had any impact on the agency's oversight," the newspaper writes.

Long before the Madoff mess consumed Wall Street, investors were keeping an eye on Dec. 16, the day Goldman Sachs was to report earnings. Jumpy investors wanted to know: Would the investment bank drop a bomb, revealing further exposure to subprime mortgages and send the market into a tailspin? It's not all bad news. Goldman Sachs reported its first quarterly loss since it went public in 1999, but the loss was in line with analyst estimates, the WSJ reports. Investors cheered, sending shares up 14 percent.

Now to the oil beat. OPEC is expected to announce a big cut in production today. The word coming out on the eve of its meeting in Algeria is that the cartel will announce its biggest production cut ever to plug up falling gas prices. According to the NYT, "Saudi Arabia, the world’s top exporter, and other producers said that OPEC was considering a cut of two million barrels a day, or the equivalent of 2.5 percent of global production." The cartel is aiming to pump the price of oil back up to the $75-a-barrel level, Bloomberg reports.

And finally, it's time to cue the tech rumor mill about Steve Jobs' health. Apple said yesterday its CEO will not be giving the annual keynote presentation (that honor this year goes to Chief Marketing Officer Phillip Schiller) at Macworld in early January, robbing the tech world of "one of the most anticipated events of the year," the WSJ writes. Shares of Apple fell in after-hours trading as investors worried that the decision may have something to do with Jobs' health, the newspaper adds. Already analysts are speculating that it's a calculated move to groom a successor. "One thing that is clear is that there's a shift in power going on at Apple," one analyst told the newspaper.