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November 1, 2007
Investor’s Cry After Fed Lies
Taking into account the surprise cut in the discount rate on August 17, yesterdays rate cut was the third in as many months. The Fed also added $41 billion to the system today, or the largest daily injection since September 2001. Unfortunately these actions were not enough to stem a wave of selling in the markets, with the Dow ending lower by 362 points.
While rekindling credit crunch fears, record oil, and today’s batch of soft economic reports were largely blamed for the selling pressures in equities, a headline from AP speculated that prices were being negatively impacted for another reason:
“Stock Investors Fear End to Rate Cuts”
Apparently investors - a day after the third Fed rate cut in as many months and on a day when the Fed injected $41 billion into the system - are now scared that the Fed will not help them during their time of need.
The Fed’s Little White Lies
The very idea that the Fed is done cutting interest rates and/or is ready to play the tough guy is, of course, ludicrous. Greenspan tried this trick back in November 2002 when his Fed stated that the risks between growth and inflation were balanced even though he knew the U.S. economy was still mired in a slow down. Below is the statement, which at the time was shocking:
“With this action, the Committee believes that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are balanced with respect to the prospects for both goals in the foreseeable future.” Nov 6, 2002
Why was the above statement released if Greenspan knew there was no evidence to suggest that the U.S. economy and financial markets were improving? Because Greenspan wanted to instill confidence in the markets (in particular crashing stock prices) by suggesting that things were better than he knew they actually were. He also wanted to do this as quickly as possible (by cutting interest rates by double the amount expected at the time!), because he knew he was almost out of ammo.
But shortly after Greenspan’s Fed warned investors that the Fed had done all it could do, the Fed stepped in and cut interest rates again in June 2003.
Enter Bernanke’s Lie
“The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.” Sept 18, 2007
With the above statement Bernanke and company want to try and provide some support for the weakening U.S. dollar with their words. They also want to try to convey to investors that the Fed can not always be relied upon to bail the markets out. Finally, they want to stress that that while improbable, it is not impossible that the Fed will have to raise rates if inflationary pressures mount.
Commenting on the above words beyond the basics is somewhat pointless (Long-time Fed watchers, like Bloomberg’s John Berry, should know better than to speculate on these Fed lies). To be sure, the Fed’s actions clearly tell us that the Fed will cut, inject, and debase the U.S. dollar anyway possible to keep the good times going. It is actions that speak louder than words…
The reason the Fed lies is because their words can influence market prices and investor sentiment (why else even release a statement if not to inform investors what the Fed is thinking and/or what the Fed wants inventors to think that the Fed thinking?) Bernanke borrowed another page from Greenspan with yesterday’s ‘balanced’ statement. Make no mistake, more Fed rate cuts will arrive at the first sign of trouble. Trouble is, the first three rate cuts have accomplished very little, and are future rate cuts could prove just as powerless over the short-run.
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