Figuring out the new boy
It’s not the primary element, but one of the things going on in the market turmoil these days is the players’ figuring out Ben Bernanke, whose ways are far less known than those of his predecessor. (In addition, we note with some amusement that some fellows still get to be regional Fed presidents who appear reminiscent of the bad old Andrew Mellon’s of the world.) The WSJ begins with speculation that the Fed has already done a stealth reduction in the Fed Funds rate:
In recent days, the rate has traded well below the Fed’s target at some points of the day — even coming close to zero at times. That has prompted some in the markets to deem this “a stealth Fed easing.”
“The way we view the Fed has changed,” said Fed watcher James Bianco. “Whether this is a temporary or permanent change remains to be seen, but the fact is the Fed eased last Friday….They are allowing the effective fed-funds rate (what the actual rate is) to deviate from the target fed-funds rate (what they want it to be).”
But Fed Chairman Ben Bernanke, both in principle and in practice, has a commitment to increased transparency, and the current Fed is extremely unlikely to change policy without an announcement. Indeed, the effects of a rate cut would be muted if it were shrouded in secrecy. Mr. Bernanke’s predecessor, Alan Greenspan, often tried to steer financial markets when their views of the economy diverged from the Fed’s. Mr. Bernanke does less of that, and that has contributed to views among Fed watchers in the markets.
Morgan Stanley said this week, “We believe that the decision to inject more reserves on Wednesday actually reflects a ‘temporary’ easing of policy on the part of the Fed. Indeed, they still do not appear to be particularly anxious to announce an intermeeting cut in the official funds-rate target….The Fed is essentially attempting to buy some time to see how things shake out. Remember, there are no rules here — we are in uncharted territory.”
Trading in fed-funds futures indicates that markets are anticipating that the Fed will cut its rate target, now at 5.25%, by one-half percentage point by the end of October.
St. Louis Federal Reserve President William Poole, in an interview with Bloomberg Television Wednesday, made no secret of his opposition to any Fed rate cut before its next scheduled meeting, Sept. 18. “There’s no need for the Federal Reserve, unless there’s some sort of calamity taking place, to make a decision before the next meeting,” he said, according to a Bloomberg account of the interview. “If the data confirm the market’s view that the economy is sagging, we’ll have to decide whether to share that view.”
Mr. Poole added that he sees no sign that the subprime-mortgage rout is harming the broader U.S. economy, and an interest-rate cut isn’t yet needed. “I don’t see any impact as yet on the real economy or on the inflation rate,” he said. “Obviously, there could be an impact, but we have to rely on some real evidence.” Asked about the remarks, Fed spokesman Michelle Smith said, “President Poole is speaking for himself and not for the committee.”
Mr. Poole, who is among the five regional Fed bank presidents with a vote on the Fed’s policy committee, is not always the best weathervane. On April 10, 2001, he acknowledged speculation that the Fed might cut rates before its May 15 meeting, but said, “There are compelling times when quick action is necessary, but this is not one of them.” On April 18, the Fed cut rates by a startling half-percentage point.
CNBC and Bloomberg should follow Mr. Poole around 24/7 with a camera crew. He’s probably good for a 400 point drop in the Dow on any given day. It is perhaps a little noteworthy that, within a mere two days of the most recent comments of Mr. Poole, the Fed lowered the discount rate by 50 basis points. Mr. Poole was notably absent from the meeting on the rate cut.