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Back to normality?

A strange thing happened after the Federal Reserve, the US central bank, announced its sixth rate cut of the year: nothing. Before and after the other five rate cuts this year the stock market reacted with gusto. This time, there was hardly a flicker of recognition.

That is how it should be. Interest rate cuts aren't there to provide immediate and false relief to the stock market; they don't have the power suddenly to make bad corporate earnings disappear, or to reverse the losses suffered by millions of investors, retail and institutional, who threw their money at poor companies. And it looks as if market participants have finally learnt what is in essence Fed rate cuts lesson 101.

Stocks rocketed ahead after the Fed's exceptionally well-timed first rate cut at the start of January. But that wasn't done for the stock market's benefit; rather its purpose was to stave off an impending credit crunch that had been brewing since the latter half of 2000. A series of defaults on loans and commercial paper programmes by companies regarded just months before as solid investment-grade credits had forced spreads to their widest levels in living memory.

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