Bernanke put to the test...

It seems that Fed action has failed to convince the market that the worst of the debt crisis is behind us and that it is doing its utmost to fix the problem. Indeed, the volatility index shot back up, short term treasury yields plummeted and stock markets were trading lower. But this only lasted a day which leads one to wonder whether what we are witnessing here are a series of aftershocks that should subside in time or the prelude to yet another major jolt. Considering that there are a large number of investments for which their August performances to date remain unknown and that, as a result, we are likely to face more bad news, it seems prudent to anticipate more turbulence ahead. The Fed's confidence building measures have clearly helped sooth tensions, but it is increasingly perceived as too little too late. Too little because we expect more turbulence in coming weeks and months and too late because three days before all hell broke loose, the Fed stated that it was more preoccupied with inflation than with the sub prime debacle. At present the markets are factoring in a quarter point cut to occur anytime between now and the next Fed meeting on the 18th of September and, with the recent jump in long term treasury yields, seem to believe that Fed policy has shifted away from an inflationary bias.