The Rally's Killed the Rate Cut

Whether or not the Fed is targeting the equity market is hotly debated among economist types. "They're on public record saying they're not in the business of helping or hurting the stock market," said Daniel Grombacher, senior economist at the CBOT. "They're more concerned with fulfilling their mandate of price stability with growth."

Nevertheless, recent trends in various financial markets suggest many market participants believe the Fed pays very careful attention to the action in the stock market. This mindset, justified or not, speaks to the moral hazard engendered by the Fed's policies of recent years, as discussed here in early 2001.

Back then, you'll recall, there was tremendous faith that the Fed's current easing cycle, which began on Jan. 3, 2001, would bring about a quick end to the bear market, then less than a year old. Remember all those charts at the time with statistics about how well stocks fare after the first, second and third rate cut? Here is an updated version, which tracks the performance of the S&P 500 since the day before each of the 12 rate cuts since 2001, thus giving shares the benefit of any intraday gains after such FOMC announcements were made. In addition, the performance results include Monday's large rally.

The results make me wonder why anyone would hope for another rate cut, or expect it would be bullish for shares. Perhaps what's most surprising (or galling, depending on one's perspective) about recent speculation regarding Tuesday's meeting is that some traders apparently haven't lost faith in the Fed's ability to aid shares, despite plenty of evidence to the contrary.

Dirty Dozen S&P 500 following 12 rate cuts since 2001
Date of Fed Ease	*Performance of S&P 500 Since
Jan. 3, 2001	-32.7%
Jan. 31, 2001	-37.2
March 20, 2001	-26.3
April 18, 2001	-27.6
May 15, 2001	-30.9
June 27, 2001	-29.1
Aug. 21, 2001	-26.3
Sept. 17, 2001	-21.0
Oct. 2, 2001	-16.9
Nov. 6, 2001	-21.8
Dec. 11, 2001	-24.3
Nov. 6, 2002	-5.8
*Performance = percentage move by S&P from close the day prior to rate cut through 3/17/03.
Source: FOMC, Briefing.com, Yahoo! Finance.

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