FOMC Says Data Has Limited Value

Wednesday, October 10, 2007

It appears that Jim Cramers infamous outburst on TV has led the Federal Reserve into a panic action at its latest Federal Open Market Committee (FOMC) meeting. According to the FOMC minutes published on Tuesday policymakers brushed away economic data and preferred to give markets a shot in the arm with its 50bp cut of the Fed Funds rate to 4.75%.
Here comes the lengthy explanation from the FOMC that tries to justify a rate cut I still consider most inappropriate in a time when surging commodities prices show that even a downturn in the USA will be offset by continuing strong demand from the economic powerhouses in the Eastern hemisphere.
From the FOMC minutes:
In the Committee's discussion of policy for the intermeeting period, all members favored an easing of the stance of monetary policy. Members emphasized that because of the recent sharp change in credit market conditions, the incoming data in many cases were of limited value in assessing the likely evolution of economic activity and prices, on which the Committee's policy decision must be based. Members judged that a lowering of the target funds rate was appropriate to help offset the effects of tighter financial conditions on the economic outlook. Without such policy action, members saw a risk that tightening credit conditions and an intensifying housing correction would lead to significant broader weakness in output and employment. Similarly, the impaired functioning of financial markets might persist for some time or possibly worsen, with negative implications for economic activity. In order to help forestall some of the adverse effects on the economy that might otherwise arise, all members agreed that a rate cut of 50 basis points at this meeting was the most prudent course of action.
If the FOMC calls this rate cut prudent I am inclined to change my brand name.
Market participants can learn a very important lesson from this decision. Don't worry about moral hazard. Just bet the house (what a pun in these days) and in case it goes wrong, cry for Nanny Benny. He will immediately fire up the Fed's helicopters and shower the burning house with "liquidity." And if the helicopters are not enough, he still has this (not so) secret weapon, called printing press. Welcome to the new world order of perma-inflation.
The Fed's excuses did not stop there. Here is a little more:
Such a measure should not interfere with an adjustment to more realistic pricing of risk or with the gains and losses that implied for participants in financial markets. With economic growth likely to run below its potential for a while and with incoming inflation data to the favorable side, the easing of policy seemed unlikely to affect adversely the outlook for inflation.
Don't despair yet. The minutes offer at least a real gem of information, telling us that the FOMC sits on wet bottoms.
There seems to have been an intense discussion of inflationary dangers. Remember, in August this was the predominant concern of the Fed.
Now they are backtracking with a rather inconsistent statement:
The Committee agreed that the statement to be released after the meeting should indicate that the outlook for economic growth had shifted appreciably since the Committee's last regular meeting but that the 50 basis point easing in policy should help to promote moderate growth over time. They also agreed that the inflation situation seemed to have improved slightly and judged that it was no longer appropriate to indicate that a sustained moderation in inflation pressures had yet to be shown. Nonetheless, all agreed that some inflation risks remained and that the statement should indicate that the Committee would continue to monitor inflation developments carefully.

We Have No Idea
The next sentence sounds as if the FOMC hopes for understanding nods:
Given the heightened uncertainty about the economic outlook, the Committee decided to refrain from providing an explicit assessment of the balance of risks, as such a characterization could give the mistaken impression that the Committee was more certain about the economic outlook than was in fact the case.
Does anybody know what the captain of the Titanic said after the ship hit the iceberg?
In my interpretation we can expect that the Fed will sideline its fight inflation as soon as bankers will repeat their cry for Nanny Benny.
Looking back into history will let me find sleep tonight. Future investment strategies are not that difficult. Don't listen to any Sunday school talk that says there will be no bailout for gamblers as it will be only empty talk. Nanny Benny will stand guard at the helipad and keep the engines ready for more action.
Which reminds me of an old Wall Street rule: Money walks and bulls**t talks.
And the orchestra of the Titanic had been fiddling while first class passengers had been jumping into the lifeboats. Wall Street today offers the same perspective: There will be lifeboats for the privileged ones only who know that the ship is sinking. All others please enjoy the orchestra.
Sorry, I can't help my cynicism. I remember August too well. Just re-read my posts from August and you will understand it.


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