A record breaking month...

March has turned out to be a month in which several records were broken. In the commodities front both gold and oil were notable for surging past their all time highs whilst in currencies, the ever so weak U.S. dollar reached new lows most notably against the Euro and the Swiss Franc. It also turned out to be a month in which wealth got wiped out in record breaking speed with the dramatic implosions of Carlyle Capital (a highly leveraged flagship fund of the Carlyle Group) and Bear Stearns (formerly the 5th largest U.S. bank) which saw it's 85 year history evaporate into thin air in just a couple of days.
The Fed has attempted to counter the hemorrhage from several angles by boosting the term auction facility to 200 billion dollars and raising the lending period to 28 days, cutting the discount window by 25 basis points and cutting the target rate by 75 basis points. It is clear from these actions that the Fed perceives a growing threat on the orderly functioning of the financial system. These moves have also brought the morale hazard debate back into center stage as a growing chorus of pundits are arguing that bailing out the likes of Bear Stearns is sending the wrong message.
In an environment in which fear has overtaken greed and where emotions are running high, irrational behavior seems to be the order of the day. The sharp drop in commodities following the 75 basis point cut in the target rate is a prime example of this. It seems that the sell off occurred because the market was anticipating a 1% cut and was therefore disappointed with a cut that was a quarter point less. If we take this train of thought a step further, what the market seems to be suggesting is that a difference of 25 basis points will be enough to determine whether we will experience an economic expansion or a recession or whether there will be inflation or price stability. If this is not insane, I don't know what is!