Surprise Fed’s rate decision and the nationalization of AIG stabilized the financial system

[RTFXtrading]

Most of us had been flabbergasted by what happened over the weekend and yesterday that we presumed that the Fed would finally cut its rate. Surprise, surprise… the Fed has decided not to cut rates keeping it at 2%, stating again that both the “downside risk to growth and the upside risks to inflation are both of significant concern”. This sends out a message once again that the central bank is not going to bow to market pressure.

In any case what drove the market was not the lack of Fed cut but the liquidity crisis and the AIG. The market recognized that a failure in AIG involved a far larger consequence than the Lehman bankruptcy. Leaks that the US government was negotiating some kind of a deal and at the end the announcement that the Fed has granted an assistance package to AIG, lending $85 billion in return for a 80% share in the company which in turn nationalizing the firm. The market enjoyed this relief rally, USD/JPY went up to 106.70, USD/CHF went up to 1.1249, during the Asian session

All in all what the Fed has done has been seen as a help in stabilizing the financial system.