Bernanke to market: Drop dead!
I have to admit that I'm surprised. I expected they'd go with a 50-point cut, if not in the funds rate then in the discount rate. While Boston Fed President Eric Rosengren voted for a 50-point funds rate cut, nine others voted for the 25-point move.
Meanwhile, the post-meeting statement was more hawkish than I expected. It talks about how "elevated energy and commodity prices, among other factors, may put upward pressure on inflation" and says that the Fed "will continue to monitor inflation developments carefully."
Another part of the statement doesn't inspire much confidence in the Fed, either. Get a load of this:
"Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."
In other words, "We're not really sure what's going on -- but we'll get back to you when we figure it out."
Maybe that's a bit harsh. But frankly, the market was looking for a shift to an easing "bias" -- or at least some leadership about the future. But this statement shows that, once again, the Fed will keep reacting to market moves, rather than getting in front of them. Consider:
The Fed failed to raise rates early enough and steeply enough to prevent the housing boom from turning into a housing bubble.
It didn't regulate the mortgage industry aggressively enough to prevent all the abuses we're hearing about now.
Then after the housing bubble popped, it kept assuring us everything was fine and that the mortgage problems were "contained" to a few subprime loans.
And now, with LIBOR rates going haywire, lenders tightening credit standards, and 2-year T-Notes yielding less than 3%, the Fed decided to go with a timid cut and no strong hint that more cuts are coming? I've been as critical as anyone about the Fed being too loose with monetary policy for some time. But I think a larger move was definitely justified here.
As for the market impact of today's move, the Fed's actions remind me of that famous New York Daily News headline: "Ford to City: Drop Dead!" In other words, stock traders did NOT get what they wanted. So the Dow is tanking. The yen (an anti-risk currency) is surging. And long bonds are flying, with the futures up almost two full points at last count.