Enough, Already! By Jim Griffin Special to TheStreet.com 7/1/01 10:00 AM ET

The reaction by CNBC talking heads to the Fed's decision on Wednesday to trim only 25 basis points from its fed funds target was instantaneous: choruses of whining about gutlessness and generalized poor-mouthing of the economic outlook. You've got to like that about the current setting.

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At about this point in a downturn, if past performance is a guide, a cry goes up that the medicine is not working, that it's different this time -- the Fed is too late, too timid, there has been too much damage done, etc. In the current down cycle, there has been a new concern that institutional changes in finance have introduced slippage between the Fed's crankshaft and the economy's drive shaft, a view to which I subscribe and have whined, er, written about, in recent weeks.

Perhaps because it is different this time, the Federal Open Market Committee (FOMC) has behaved differently. It has slashed its fed funds target by 275 basis points in six moves in less than six months, a record that can be compared for its aggressiveness only with the 1982-83 rollbacks from high-teen levels by the Volcker Fed. If it had been 300 basis points in six moves in six months, would that have made all the difference?

The minutes of the May FOMC meeting suggest that last week's decision to do just 25 basis points is either a compromise between differing views or a unanimous judgment to taper off and put policy on a glide path toward the conclusion of the easing trend. The nature of the debate around the table may differ between those two alternatives, but the policy result may be the same in either case.

I hypothesized a week ago that the rise of the capital markets relative to banks and thrifts in the financing of economic activity might imply that "the Fed will ease and ease again, until it force-feeds its policy through a balky and imprecise transmission mechanism." The FOMC's most recent action would seem to reject that hypothesis. Perhaps it is too market-centric, suggesting that nothing can go right until the market says it's going right.

In any case, the market has reacted a lot more positively than the instant analysts did. Perhaps it's ready now to be weaned from the mother's milk of Fed ease, ready at last to make its way on its own in the world as it is. With preannouncements mostly behind and a new quarter ahead, the market may be ready to lift its eyes from current travails and look farther down the road.

In the second half of the year, there are tax rebates to look forward to, as well as a relaxation of the energy price spikes that have acted as a tax hike on consumers and businesses. To the extent that monetary policy works like an early version of a turbocharger -- first a lag, i.e., nothing happens, then a boost -- its thrust may kick in more strongly in the months ahead.

The recent data have provided some basis for hope about the outlook. Consumer confidence is holding up remarkably well. Initial claims for unemployment insurance offer a basis for believing that the worst of the labor market adjustment process is passing behind us. The leading economic indicators index for May showed a big bounce. The Philadelphia Fed index of future manufacturing activity has exploded upward off a low base.

In short, there is a respectable basis for challenging the prevailing view that the economy is in trouble, is in some sort of new era maze from which there is no quick exit. An idea that made sense to me late last year, when the slowdown set in, was that this cycle might be the first in tech time: sudden onset, quick adjustment process, early conclusion. The sudden onset and vicious adjustment parts have been booked, but the early recovery idea has been a casualty in the confusion of battle. The FOMC's decision last week may serve to resurrect it.

That decision was, in effect, a statement of "enough, already!" The market just may be ready to accept that the phase of being nurtured by the Fed is coming to an end, that it can make its way without further assistance in a world that may not be so frightening after all.

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