After all of the criticizing I do about misleading headlines, it was a rare pleasure to read one that perfectly summed up both the article and the subject it was addressing: A Snub for the Fed’s Gift. Sayeth the WSJ: "The Federal Reserve sprinkled cheaper dollars on the economy, but it
wasn’t enough for investors looking for stronger economic growth and an
end to the mortgage crisis."
Despite yesterday’s fed fund and discount rate cuts, the market threw a hissy fit, with the Dow taking a ~300 point dip.
"The markets are simply disappointed," was the money quote in the piece.
Let’s briefly examine that: Some people seem to think the Fed’s mandate is to backstop speculators; others expect the Fed to overturn the Business Cycle and avoid recessions at all costs. Still others believe the Fed’s role is to help which ever party is currently esconced in power to get re-elected.
Their job is none-of-the-above. The Fed exists to insure maximum employment, price stability and moderate long term rates. By that standard, employment has not been so bad over the past few years — not as good as reported, but not terrible either. And Inflation has been elevated — Crude Oil is once again over $90 — to the point where it cannot be ignored.
There are many explanations for the different reaction to the Fed’s actions. My favorite is that when the Fed cuts rates while the market is oversold, we get a rally. When the Fed cuts when we are overbought — e.g., when a 2 week, 1,000 point Dow rally fully reflects anticipated rate cuts — we get a Sell-the-news reaction.
Hence, yesterday’s whackage . . .
courtesy of WSJ
A Snub for the Fed’s Gift
Stock Investors Say Thanks a Lot, But Is That All? Dow Falls 294.26
PETER A. MCKAY
WSJ, December 12, 2007; Page C1