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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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