Here I go again on my own.
Going down the only road I've ever known.
Like a drifter I was born to walk alone.
And I've made up my mind, I ain't wasting no more time.
Here I go again.
SAN FRANCISCO -- Leaving financial markets writhing like Tawny Kitaen in those "classic" Whitesnake videos, the
lowered short-term lending rates by 25 basis points today. The key fed funds target is now at 3.75%, its lowest level since May 1994.
There was no overriding consensus on what the Fed would do, or how the market would react, as reported
last night. But few expected such a relatively muted market reaction.
Dow Jones Industrial Average
fell 0.4%, the
slid 0.5%, while the
rose 0.5% and the
gained nearly 1%. The bond market rallied, as the quarter-point move quelled inflation fears that were revived by more aggressive cuts earlier this year. But the long end of the Treasury yield curve failed to sustain its early rise; the price of the benchmark 10-year Treasury dipped 1/32 to 98 9/32, its yield unchanged at 5.23%. The 30-year bond rose 17/32 to 96 18/32, its yield falling to 5.62%.
The long bond's rally notwithstanding, the Fed's move today didn't appear to please many traders. Equity participants, fast becoming jaded about the ability of the Fed to revive corporate profits, weren't enthused about the "mere" quarter-point cut. Fixed-income traders, meanwhile, fretted that the Fed will continue to ease, as their
statement indicated the central bank's belief that risks remain "weighted mainly toward conditions that may generate economic weakness."
Judging by the market's reaction, it's hard to argue that
was kowtowing to Wall Street with
today's decision, as has been alleged in the past. Additionally, stocks' recovery from initial losses suggested traders interpreted the Fed's move to mean that the central bank believes the seeds of economic recovery have been sown.
Critics, however, said today's wishy-washy action leaves financial market participants twisting in the wind, trying to decipher the
"What Greenspan didn't learn from the 1990-91 experience is that umpteen moves was not good policy," said Jim Bianco, president of
in Barrington, Ill. "The market likes the
approach of the
administration: Decide what the funds rate should be. Then just go there and then sit on your hands."
Bianco, who correctly forecast the 25 basis-point cut last night, suggested the Fed would have been better served to have cut fed funds by 300 basis points on Jan. 3 vs. this "little by little" approach.
Admittedly, that's an extreme scenario. But his point was borne out by the fact that speculation about a possible intermeeting move began almost immediately after the Fed's action was announced at 2:15 p.m. EDT. But a second glance at the Fed statement left many observers convinced the Fed is unlikely to move prior to its next scheduled meeting on Aug. 21.
"There was no language
in the statement about them 'monitoring developments closely' as with preceding the last two intermeeting cuts," noted Drew Matus, financial market economist at
. "Plus, there was little detail on the explanation of risks in the economy."
Indeed, the Fed's statements about economic risks seemed almost an afterthought: "The patterns evident in recent months -- declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad -- continue to weigh on the economy," the statement declared. "The associated easing of pressures on labor and product markets are expected to keep inflation contained."
Matus, who forecast a 50 basis-point move on
June 14, today suggested the Fed may have felt an ease was unnecessary from a pure economic standpoint. Certainly, many Fed governors have steadfastly repeated a mantra that the economy will avoid recession and a recovery looms. Some, notably
Fed Gov. Lawrence Meyer
, have warned of the risk of overshooting with monetary policy easing.
But the central bankers proceeded because "you have to keep people confident until we get the tax rebate," the economist said. "The Fed is trying to bridge the gap so we don't have a sharp drop in confidence or equities."
suggested the Fed was prudent to hold back from a 50 basis-point ease today, noting the forthcoming tax rebate, falling energy prices, some improvement in inventories and the fact that 250 basis points of easing prior to today have yet to work their way into the economy.
Good points all, but they also suggest the Fed could have done nothing today, although all agree that would have very likely roiled equities. Drat. Forget what I said earlier about Greenspan no longer kowtowing.
All's Fair in Love and Monetary Policy
longtime critic of the Fed's recent policies, it's not unfair to say I would have found some fault in
the Fed did today. But it should be noted that not everyone was displeased with the outcome.
"My concern is the Fed is overmanaging the economy and pumping too much liquidity that will come back to haunt us because of inflation concerns," said Mickey Levy, chief economist at
Banc of America Securities
. "I'm pleased they shifted from an aggressive
stance to a more gradual" approach.
Levy, who is a
monetarist, expressed concern that the Fed is incapable of resolving the capital-spending slowdown with rate cuts. But by being so aggressive this year, they are "only creating problems for the future," he continued. "Inflation is higher than desired ranges and inflation expectations could move back up quickly when the economy accelerates."
Granted, less easing is better from the inflation standpoint.
Dan Laufenberg, chief U.S. economist for
in Minneapolis, also believes the Fed did the right thing today. Furthermore, he suggested the Fed is very near the end of its easing cycle, if not already done after today's move.
The quarter-point cut "was prudent because the pipeline is filled with monetary and fiscal stimulus, in the form of lower taxes and increased spending," the economist said. "One of the things that's often overlooked is how impatient we've become in terms of stimulus. You still have a lag effect, and have to be patient to see the full effect" of the Fed's rate cuts, now totaling 275 basis points this year.
Judging from the market's reaction (and the emails), Laufenberg's point about investors' lack of patience is a good one. Then again, that brings me back to an
old critique about how it was Alan Greenspan who helped create a nation of rate-cut junkies.
There I go again.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.