| The Fed's policy statement was crafted in a way meant to soothe investors who were hoping for a 75 basis point rate cut. The statement opens the door for an inter-meeting rate cut, should conditions warrant. To accomplish this, the Fed put a large degree of emphasis on the many risks facing the U.S. economy and by telling the markets that they would be watching monitoring developments closely. The Fed was so determined in their statement to tell the markets that they are aware of the numerous risks to the economy that they listed a plethora of them. The Fed's laundry list included: pressures on profit margins, the stock market decline, the recent unwanted build in inventories, and global economic conditions. Importantly, the Fed made reference to the emergence of excess productive capacity, a critical issue with respect to the degree to which current economic weakness is structural rather than cyclical. To the extent the Fed perceives the problems in the economy to be more structural than cyclical, rate cuts are likely to continue to be aggressive and low interest rates will stay in place for longer. The Fed's hint to the markets that they stand ready to cut interest rates again as conditions warrant is clearest in this statement: "In these circumstances, when the economic situation could be evolving rapidly, the Federal Reserve will need to monitor developments closely." The Fed typically uses the statement that they will "monitor developments closely" to tell the markets that are more apt than usual to change rates in response to inter-meeting developments than under more ordinary circumstances. While the statement is meant to be soothing, equity investors won't likely be easily pleased. Equity investors needed a larger rate cut to justify turning their backs on the recent swell of bearish news from Corporate America. In the near-term, it unlikely that this latest Fed action will turn stocks, despite the Fed's attempt to soothe investor anxieties. Equities are more likely to turn when Corporate America, and not the Fed, begins to deliver good news. But expect a jump in auto production and spending related to increased levels of housing turnover to lift economic data by the middle of next quarter and for equity investors to then begin to anticipate corporate earnings reports due out at the end of that quarter to be better than is now expected. At that point there'll be a shift out of bonds and into stocks with possibly great intensity. |
