David Gilmore
Noting a good sense of humility after writing previously that the Fed 
would not cut rates between meetings, only to have the Fed surprise me, I believe the Fed will wait until the March 20 FOMC meeting before cutting another half-percentage point. But included in this forecast is the not-so-fine print ... high levels of confidence in calling Fed rate policy in a sharp downturn or upturn can be hazardous to one's health. I am taking the other side of Wayne Angell's call on Monday. I give an early Fed rate cut a 20% chance, not an 80% chance.
decided it was necessary to lift investor, business and consumer sentiment to avoid a hard landing. Markets were discounting a rate cut at the FOMC meeting on Jan. 30-31. Few were discounting a "between-meeting" rate cut. Indeed, during Greenspan's tenure at the Fed, he had last overseen a between-meeting cut on Oct. 16, 1998, when Long Term Capital Management's leveraged trades were threatening a financial crisis. My point is that Greenspan, and eventually the FOMC, determined the best way to aid sentiment and reduce the risk of a hard landing was with a surprise rate cut. Unexpected rate changes draw larger responses among investors, firms and households. Indeed, if you glance at the Nasdaq Composite Index since Jan. 3, one sees the power of central bank rate-cut surprises (timing mostly). But there is a downside risk to market surprises. Often they signal panic or that perhaps the Fed knows something the market does not. Indeed these responses were common in the wake of the Jan. 3 move, and very likely troubled Greenspan and his colleagues. Furthermore, the law of diminishing marginal returns applies to surprise rate changes as much as foreign-exchange intervention. The more they are used, the less impact they have. And arguably the element of surprise is reduced, given that a good portion of the market, thanks in part to the belief that Angell knows something, has priced in a between-meeting rate cut. Keep in mind that Greenspan and the Fed have been relatively upbeat about the slowdown being more V-shaped than U-shaped, and in the Feb. 13 Senate Banking testimony, Greenspan was cautiously optimistic. This view was subsequently echoed by other Fed officials. Indeed, the Feb. 13 testimony was far from an endorsement of an early rate cut. That said, the Fed is staying flexible and so it should, given the risk of a harder landing. It would be wrong to suggest that Greenspan and the FOMC have changed their minds on the timing of the next cut in the past two weeks. Consumer sentiment for February, as measured by the University of Michigan, was at a multiyear low (released last week) and U.S. stocks are under pressure from poor earnings. (Nasdaq is a good proxy for investor sentiment.) Nevertheless, claims seem to have reached a plateau and consumer demand is holding up, if supported by deep discounting. And who can forget the January PPI and CPI data? Surely, inflation data have before risen well into a recession (see 1991) and are not a rate-cut killer, but likely will give Greenspan and company a reason to wait. The point is, the world is not terribly worse off since Feb. 13 to warrant the helping hand of Greenspan now. What about Greenspan's revision to his testimony reported Monday? According to Angell, it was behind lifting his confidence level to 80% from 60% for a rate cut by Wednesday morning. Greenspan would be remiss if he did not update his testimony given the length of time between his Senate and now House testimony. Dallas Federal Reserve President John McTeer said Monday that the Fed prefers to discuss policy changes at regularly scheduled FOMC meetings. This position is not new, but the fact that McTeer saw a need to remind all concerned was a deliberate attempt to counter speculation of a rate cut Tuesday or early Wednesday. It should also be kept in mind that McTeer is not a voting member of the FOMC. Never say never. On balance, the data are slightly worse than they were two weeks ago, and sentiment of investors and consumers remains depressed. And the Fed needs to be flexible given the pace of the decline and the sizable risk of a hard landing. However, on balance, I do not think the Fed will repeat a between-meeting cut at this point.
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