Suspicious behavior on Wall Street
Commentary: Rate-cut predictions raise dark questions
By Paul Erdman, CBS.MarketWatch.com
Last Update: 1:08 PM ET Aug. 15, 2002
SAN FRANCISCO (CBS.MW) -- Everybody has been up in arms lately over CEOs exercising stock options and bailing out after they had pumped the price of their company's stock to heights that they knew full well were unjustified and thus not sustainable, leaving the rest of us holding the bag.
Similarly, Wall Street's research analysts have come under fire for hyping stocks to a gullible public while sending internal e-mail to each other referring to the same stocks as cats and dogs.
Maybe I'm getting paranoid, but it seems another group of Wall Street insiders has recently been behaving in a rather suspicious manner. I refer to the economists or pseudo-economists who work for some of our most stalwart investment firms
Morgan Stanley (MWD: news, chart, profile) heads the list. They told the investing community that the Fed was going to cut its target fed funds rate from 1.75 percent to 1 percent in the near future, starting with a half-point cut this week.
Were they just dumb? Or were they very clever?
If they wanted to create a rally out of very thin air by broadcasting such nonsense, they succeeded quite well, especially after Lehman Bros., Deutsche Bank and many of their other brethren on Wall Street jumped on the bandwagon. It might be quite educational to examine trading patterns during the rally. Did some of these firms take advantage of a selling opportunity of their own making?
Of course, a couple of days before the Fed meeting, the firms' self-serving calls and the market both cooled off as the views of more sensible investment pros gained the upper hand.
But now they're back at it again. The rate might have remained unchanged, they are now telling us, but the bias has shifted radically in favor of future rate cuts. In fact, the wording of the Fed's statement strongly suggests there's a good chance that the first such cut will come before the next Fed meeting Sept. 24.
Really? That's not the way I read it.
The Fed said that its overnight rate was at a level that continues to provide stimulus to the economy. This, coupled with the strong growth in productivity, "should be sufficient to foster an improving business climate over time."
While delivering this basic message, the Fed also stated the obvious. Two factors -- falling stock prices and corporate governance scandals -- had produced a temporary crisis in confidence that had resulted in slower-than-expected growth this summer. Until the danger stemming from these extraordinary sources abates, despite the confidence that the Fed has in the overall future path of the economy it, it feels that the risks are temporarily weighted toward "conditions that may generate weakness."
Does that latter statement mean the Fed is poised to cut rates within weeks?
Of course not. On many occasions in the past, the Fed has warned that the risk of economic weakness in the immediate future is greater than that of a revival of inflation without following through with any change in its key interest rate.
Barring some new external shock, that is what is going to happen this time around.
Economist and author Paul Erdman is a CBS.MarketWatch.com columnist.
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