Street to Fed: Take Your Lousy Half-Point Cut and...

LOS ANGELES -- Once again, Alan Greenspan thumbed his nose at the financial markets and, once again, Wall Street responded with a hand gesture of its own.

The Federal Reserve lowered the key fed funds rate by 50 basis points today, its third such move this year. Yet the markets, particularly the stock market, were again left wanting more from the central bank. Expressing disappointment that the Fed didn't lower rates by 75 basis points (or more), investors chose to sell news of the "mere" half-point cut. The Dow Jones Industrial Average and S&P 500 each lost 2.4%, and the Nasdaq Composite shed 4.8%.

Here at the Milken Institute 2001 Global Conference at the quintessentially 1950's California-style Beverly Hills Hilton Hotel, the attitude about the Fed's move today was one of frustrated resignation.

"I was expecting 50 basis points," Donald Straszheim, president of the Milken Institute in Santa Clara, Calif., said in a press briefing shortly after the 2:15 p.m. EST Fed announcement. "Greenspan is predictable. He rarely surprises the markets and didn't today."

Maybe Greenspan doesn't often surprise the markets, but he seems to be making a habit of disappointing them lately. But as I said when he dampened expectations for an intermeeting rate cut, I believe the Fed did the "right" thing today by not kowtowing to the stock market or risking appearing as if it were panicking about the state of the economy.

However, early returns from the conference attendees and speakers suggest most disagree with a view that the U.S. economy isn't as weak or as in need of a drastic Fed action as Wall Street is indicating. A view that the U.S. economy is structurally sound for the long term but very unstable short term was an oft-heard refrain on the conference's first day.

"The economy is weakening rapidly, and I expect it to weaken further," Straszheim said, citing layoffs, a decline in manufacturing orders, and yet more analyst earnings downgrades to come. Because he expects that to come to pass, the former Merrill Lynch chief economist predicted the Fed will lower rates by another 50 basis points prior to its next scheduled gathering on May 10 and then again at the May 10 meeting.

Such a move would bring the fed funds rate to 4%, its lowest level since April 1994.

When asked why such seemingly dramatic moves will be necessary, despite the continued strength in sectors such as housing, automobiles and retail sales -- as well as the apparent stabilization in consumer confidence in March, according to the University of Michigan's survey -- the economist replied: "Where you've still got strong numbers, just wait."

Most announced corporate layoffs haven't been implemented and thus haven't yet affected the unemployment rate and consumer confidence, he said, suggesting it will take six to nine months for the U.S. economy to feel the full brunt of such developments.

But despite concerns about the slowing U.S. economy and its impact on the world economy, neither Straszheim nor co-panelist Robert Hormats, vice chairman at Goldman Sachs, would come out and say the Fed should have done more today.

Straszheim even suggested recent criticism of Greenspan for being "too tight" amounts to "Monday-morning quarterbacking." Because of ever-tightening labor markets and rising wages and salaries, the Fed was "understandably reacting" when it raised rates in the second half of 1999 and early 2000, he said.

Meanwhile, Hormats said more economic weakness is "already baked into the cake" and that "even Fed stimulus won't make the [inventory overhang] go away." Also, he's more concerned about the economy today than he was three months ago because of declining consumer confidence, and declared that a "negative wealth effect" from falling stocks will clearly curtail consumer spending on big-ticket items going forward.

But the Goldman executive noted Greenspan has said the central bank will move between meetings if need be and today gave ample reason to believe there will be more rate cuts forthcoming. More fundamentally, Fed easing so far (and today) will help the economy, he added.

Financial market participants need to "guard against excess pessimism," which can arise because "we see the downturn much move vividly," Hormats said. "There is no cause for despair."

Apparently, many investors have failed to grasp the somewhat muddled message that they should be concerned, but not alarmed.

Ground-Floor View

Perhaps because he's a "real, live CEO" and not an economist type, Barry Sternlicht, chairman and CEO of Starwood Hotels & Resorts (HOT Quote), offered a less kind view of Greenspan but a more optimistic outlook on the economy.

Greenspan's Fed has been "asleep at the switch -- way asleep," said Sternlicht, who participated in a panel at lunch (chicken Caesar salad that was pretty good). "We are in for quite a correction."

But at the same time, "the core economy is not that bad," he declared, noting that business travel among representatives of "brick companies" such as drug makers and consumer-products firms remains on a usual pace. Of course, there are fewer travelers from "click" companies staying at Starwood's properties these days.

Sternlicht, who began his career as an equity analyst, said the problem is that Wall Street is struggling to try to figure out "who wins the profits" that will be generated by the productivity enhancements of technology, specifically the Internet. In the late 1990s, all bets were being placed on the Web's first movers, he said, recalling that priceline.com (PCLN Quote) once sported a valuation higher than that of the entire hotel and airline industries. Today, the belief is that the companies best able to implement the technology will win, but Wall Street hasn't yet figured out who they are, he said, adding that companies such as Starwood also are now taking a more measured, reasonable approach to how they're "Webbing" themselves.

Hormats, who also appeared on the lunch panel in the hotel's huge International Ballroom, largely agreed. It was not the electricity providers who ultimately profited from the onset of its mass use, he recalled, but those manufacturers who were best equipped to quickly incorporate it into production facilities.

There is a "crisis for the financial markets, not an economic crisis," he declared. The still unanswerable question, of course, is whether the economy can avoid being lured into crisis by Wall Street's distress.