Snowshoe,
The Fed could have taken the action they did (no rate cut, but negative bias) or they could have instituted a rate cut with or without a change in bias, or they could have simply changed nothing.
From the perspective of the market, their choice was the worst of all possible choices, because it signaled that the Fed has changed its view of the US and global economies, and is a backwards admission that a rate cut (at this point in time) would not likely achieve desired results. Keep in mind that rate cuts have an intended purpose, and if (for whatever reasons) the Fed believes that the rate cut(s) will be ineffective, then there is no sense in wasting the limited ammunition remaining.
Having said that, I am not criticizing the Fed for its decision. I am merely pointing out that the decision would not be favorably received by Wall Streeters, and initially it wasn't. In the intervening time since then though, the markets seemed to have shrugged off the Fed's viewpoint and have rallied somewhat, albeit on anemic volume.
The Fed has other ways in which it can attempt to regain control of the economy, short of further interest rate cuts.
Most notably, the Fed controls the global money supply of US$s. If we look at the money supply, since the market lows of July, US$s have flooded the markets, somewhere close to $900B (US) additional if my memory serves me.
Now in more ordinary times, that type of increase in the money supply should lead to inflation. But so far, inflation is still just a distant memory and deflation continues to reign as the main threat in the eyes of the Fed. Why?
Companies have zero pricing power for myriad reasons. As the price of commodities drop, business is forced to pass these lower costs on to consumers simply to remain competitive. And, competition isn't what it used to be. Global competition now exists, and in many cases, the expenses from foreign firms are far less than the expenses borne by firms producing within the USA or Canada. Even such lost cost "havens" as Mexico and South American nations find that their labor costs are being undercut by someone else, somewhere else on the planet.
As noted in Fleck's column, low interest rates continue to support the weak and inefficient companies, artificially making them temporarily competitive with their larger competitors. This increases both available supply and current over-capacity, both of which work against inflation and guarantee a continued movement towards deflation. The Fed is not stupid. They can see this happening, but to some extent their hands are tied given current eco-political sensitivities. That is why I believe that nothing of major importance will happen with the US economy at least until after the mid-term elections are over in November, and the incumbents have availed themselves of every last opportunity to be re-elected.
Fleck's article also points out that the Fed has openly opted for a slow yet painful easing of the bubble, as opposed to a sharp, quick puncture. While I'm sure that the Fed and the elected officials likely see the slow process as preferable to a sudden "pop", their meddling in the business cycle is certain to prolong the pain.
So what would you (or anyone else) prefer at this point, a sharp sell-off (say 50% down on the Dow, NASDAQ, S&P, NYSE) or the death of a thousand slashes (say a similar sell-off of maybe only 40% spread out over, say 5 years)? For myself, I prefer the sharp and immediate pain; get it done and over with. But others may feel differently.
KJC |
