We have pointed out on several occasions in recent months how the Federal Reserve Bank has perhaps been too in tune to the moves of the market. When the market (represented in these cases by analysts from the major investment banks) has not gotten as aggressive of a rate hike as they would have liked it has reacted as a spoiled child not getting a toy by what has been called protest sell-offs. Well the Fed got real worried this past week and did something it has not done in recent memory, dropped the Fed funds rate by 75 basis points in one shot. And they did it outside of the Federal Open Markets Committee (FOMC) meeting. The last time the Fed adjusted the funds rate outside of the regularly scheduled FOMC meeting was in the aftermath of 9/11. That tells us the economy is in serious trouble, though yesterday various administration officials said the opposite. But if this is just a soft spot in the economy, surely a 25 basis point cut would do and the Fed could have certainly waited the week until the FOMC met.
In the wake of this move, however, we are hearing something different. It is not complaints that they were not aggressive enough and it is not kudos for a bold action but instead we are hearing some commentators suggest the Fed panicked. This is a serious charge as the Fed is supposed to represent a steady hand. It was after all former Fed Chairman Alan Greenspan who warned a decade ago about irrational exuberance.
While comparisons never are fair and the Maestro has been knocked down a few pegs from his lofty perch, as many analysts are blaming his easy money policy in the early part of this decade for the problems we are having now, at least he recognized when the market was engaged in “irrational exuberance.”
The current fed has seemed to react quickly to downturns in the market. They have done so even with the Dow just a few percentage points off of its all time high as if the anytime the market is not making highs the Fed needs to step in and lend a helping hand. Given the breadth of damage created by the subprime debacle, shouldn’t the market be correcting? Remember that the market made its all time high above 14,000 after the so-called credit crunch began, yet the Fed cited weakness in equity markets as a reason it began the current easing cycle. Perhaps Mr. Bernanke should have been preparing people for a correction as the Maestro did a decade prior.
