By the time Alan Greenspan sits down to speak to a House committee tomorrow, it's not silly to think there could be a mob of people outside the Federal Reserve's building with rakes, torches and other assorted farm equipment, sort of like in the 1980s, when the Fed declared war on inflation.
Or that scene in
when, apparently, the whole town had nothing more to do but show up at that castle armed with torches. (Come to think of it, that'd be pretty cool.)
This time, though, they'd be stock traders, bellowing for Greenspan (when he addresses the
House Finance Committee
tomorrow morning) to administer
rate cut as an elixir for the market's recent travails.
The calls for another cut in the
fed funds rate from the market, currently at 5.5%, have grown louder by the day. They were heightened by the unusual occurrence of the Fed's spokesperson yesterday saying Greenspan will be revising his
testimony to the
, which he gave two weeks ago. Typically, this speech is little more than a standard reiteration of what the Fed boss has told the Senate in his appearance before that body.
Now, though, Greenspan's likely to talk more glowingly about the possibility of rate cuts, although, like other Fed officials, maintain the stance that the economy is on the way to recovery.
It's a fine line he has to walk -- make it sound like the Fed's doing its job without causing a panic.
But it's also a line he and the other Fed officials have been following with little wavering lately. If you notice, most of the recently stumping Fed officials sound uncannily like one another these days. That runs from the most hawkish, that is, those who would be looking for the most restrictive policy, like
Richmond Fed President Al Broaddus
, to the most dovish, like
Dallas Fed President Robert McTeer
, who would be looking for the most relaxed, or easiest policy.
scorecard shows, this gang has decidedly different views. And though they say their opinions are their own, lately they're all maintaining that the economy isn't falling apart, while still cautioning that they're at the ready to prevent further deterioration.
Along those lines, McTeer's comments last night seemed like a refutation of current market sentiment, as well as of economists banking on a rate cut before the week ends. He said that unless the need for a rate cut is "obvious and great ... I think there is a preference to make monetary policy at regularly scheduled meetings."
That statement alone should probably give the market enough sense to realize that barring a massive decline in Thursday's
National Association of Purchasing Management's
index or a tremendous plunge in stocks, the Fed is likely on hold until March 20. (It also sounds like a jab at
economist Wayne Angell, the former Fed governor, who yesterday conjectured an 80% chance of a rate cut later this week.)
Fed cuts generally have long- and short-term effects. Long term, they improve conditions by making borrowing easier, which allows consumers and companies to spend more money. Most immediately, they can restore confidence to consumers, and especially in the stock market.
"One of the Fed's jobs is to keep a bigger perspective than the markets do," said Suzanne Rizzo, economist at
. "When you're actively involved in the markets and the market is going down, it's hard. You want more liquidity until that's converted to inflation and then you're unhappy."
If Fed rate cuts take six to nine months to work their way into the overall economy, thinking about the longer-term factors is useless now -- there's meager evidence showing whether they're making a difference a month later, although there's some money supply statistics showing improved liquidity.
Then, there's that last factor -- the stock market, which has indeed deteriorated. It went a little nuts in January after the Fed shocked everyone, but lately it's gotten it into its head that its recent problems are justification for a further cut. But if it takes six to nine months for material improvement in the economy, cutting now does nothing for the Fed except make stock traders feel better.
That only worked temporarily after Jan. 3, and the Fed doesn't even have the shock factor on its side anymore. A bunch of public proclamations has put a stop to that.
Fed Vice President Roger Ferguson
-- viewed as something of a moderate among the Fed governors -- took the unusual step of questioning how consumers' assessment of the future affects current spending in a speech today.
noted that the fall in consumers' assessment of the future seems to "have some limited predictive ability for future household spending." And Greenspan's past efforts in talking down the market haven't done much either. (Raising rates initially didn't do it either -- it only kicked in when energy prices and the plunge in technology spending took hold.)
Besides, one has to wonder whether the market is expecting additional cuts if the Fed cuts by 50 basis points this week. The Fed is most certainly going to cut rates March 20, if not sooner, although the latter is
receding as a possibility.
"I think in general they believe they've already moved pretty aggressively, and I think they're all set to go again at the meeting," said Josh Feinman, chief economist at
Deutsche Asset Management Americas
. "Then, they'll say '150 points -- it's not like we're falling asleep at the switch.'"
Another cut now strikes some as potentially dangerous, because it's predicated largely on the stock market when the Fed will still get several important economic releases prior to the meeting, which takes place in three weeks.
By then they might be catapulting people over the walls at the Mariner S. Eccles building in Washington.