Investors will be listening closely when Fed Chairman Ben Bernanke speaks in Jackson Hole, Wyoming today. The market is waiting for any discernible hint of an upcoming rate cut, as an affirmative indication could lead to a market rally. However, while opinions are mixed about Bernanke’s handling of the subprime lending crisis, I believe he’ll do the right thing and stay put on rates for now.
In general, a rate cut could be interpreted as a move to bail out institutions who exposed themselves to excessive risk via asset-backed securities. Unfortunately, the best move is likely to let the process of natural selection run its course in the market. This means letting those funds that were overexposed eat their losses or, even worse, sink. After all, there is a reason why higher returns come with higher risk.