Wall Street Manna

An irreverent look at Wall Street

Wednesday, December 12, 2007

What will the Fed do next?

Look at these statements by the Fed in August:

  • August 7th: The Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected
  • August 10th: The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets.
  • August 17th: Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

The Fed did a complete about face, but it took three days. Today it took three hours after the FOMC decision for the Fed to say they had alternative tools and sources. We can fix housing and the credit problems with our money, or we can have the sovereign wealth funds come in and throw it at us. Which they will.

The Fed had the opportunity to change psychology on the market, and on housing. They whiffed. But the market will force their hand. And it did it, knocking rates down by 22 basis points across the board.

So we have our central bankers looking like buffoons. That has to be modeled into stock selection. So we have to trade the stocks that aren't dependent on the Fed to lower rates, and back to technology, whose sponsors are the growth fund buyers, that are oblivious to the Fed.

But at least the market won't be so concerned with every Fed head's blabber. You can discount what they say, because their inconsistency has made them become more of an annoying side show as they appear to be reckless with their words while simultaneously being clueless to current economic conditions.

But I suppose I should of learned my lesson from Bernanke. Before he boosted rates to 5.25%, he had suggested to Maria Bartiroma, that the Fed was done raising rates at 5%. When that story broke, Bernanke had to show that it wasn't just a slip-up, so he took rates up another notch.

And Bernanke, took both rates, and the Fed, down another notch.

But, the Maria Bartiroma story lasted only a couple of days. This may too. The WSJ hinted that the Fed could cut the discount rate in the next few days. The reasoning? You don't need all the FOMC member votes.

Let's hope Bernanke is as thin skinned as last time, and reverse his decision that the drop in the market gave the Fed.

But is this any way to conduct Fed policy?

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