Easing Talk Has Economists Worrying About Fed's Credibility
By Justin Lahart
Associate Editor
12/18/00 2:04 PM ET
If you asked last Friday what the Federal Open Market Committee would do at its meeting Tuesday, just about any economist would have given you the same answer.
As much as Wall Street disliked it, the FOMC wouldn't abandon the course of gradualism that's stood it so well over the last decade. That meant that there was virtually no chance of a rate cut, and even a move in the so-called policy directive to an easing bias, from the previous meeting's tightening bias, was unlikely. The Fed would move to a neutral bias, paving the way for rate cuts in the first quarter, and that was that.
But this morning, The Wall Street Journal published an article that everybody reckons is a leak straight from on high suggesting that the Fed may be getting more aggressive about easing, and that it will at least move to an easing bias tomorrow. And whereas everybody was pretty certain about the meeting's outcome on Friday, now there's a lot of doubt. So TheStreet.com asked five economists what they think will happen Tuesday at the FOMC meeting, and why. Here's how they responded:
Setting the Stage
J.P. Morgan financial economist Marc Wanshel
The Journal article didn't have any specific comments, but I would assume that somebody talked to somebody and that sentiment is moving in the direction of a more aggressive move. Whereas I would have said on Friday the best bet was that they would go neutral with some risk that they would do something more aggressive, I think there's a good shot now that they go to an easing directive. I still think it's a less then 50-50 bet that they actually ease, although it certainly is possible.
At the last Greenspan speech, he seemed very much plugged into going neutral. This is a little bit more aggressive. He probably wanted to set the stage for something more aggressive than what people are anticipating. And he may have wanted to do it prior to meeting with Bush, because if he hadn't set the stage for it a little bit earlier it might have looked like he was responding to the meeting with Bush. He's establishing that there's already a case for it before he talks to the president-elect, that he's not being pushed into it by a politician.
Market Expects More
Salomon Smith Barney economist Mitchell Held
You have to at least be open to the possibility that they move toward a bias toward ease. Our best guess is still that they take away the bias and go to neutral. It's not out of the question for them to go to an easier bias. We've got to keep in mind, bias or no bias, the Fed could cut rates no matter what. They don't have to have an easier bias to cut rates -- they've done that on both sides of the coin under Greenspan.
It's an indication of direction and certainly the economy wouldn't mind a little monetary boost here. The question of course is how much you get, not just at the first blush but cumulatively. The market's expecting three 25-basis-point cuts through spring. I think that's a little aggressive at this point. If the economy slows further, that's possible, but we have the economy at around 2.5% growth, give or take, for the final quarter this year and in the first half of next year. With those kinds of numbers you may not need a 75-basis-point cut. We have 50 as our best guess at this point. The market is probably expecting a bit more.
Impartiality, We Hardly Knew Ye
Chase Asset Management chief market analyst Don Fine
[The Journal article] is unquestionably a leak and since the immediate world just assumed that the Fed tomorrow would just go to a neutral risk propensity, obviously the fact that they're leaking something to the Journal means they're going to go beyond that.
If they were to ease, first it would mean that their view of the economy is considerably worse than everybody else's. There would be an element of panic, because the economic numbers that have been released so far, while they are certainly soft, are not indicating a recession of any sort. If the Fed were to ease tomorrow, it would indicate that that they have information that indicates things are considerably worse than the numbers that are public so far would lead one to believe.
It has another impact. To me it would render statements on risk propensities or biases obsolete. To go from a tightening bias, or a risk propensity toward heightened inflation, and five weeks later you're actually easing -- of what purpose or good would these bias statements be in the future?
Having said that, it would appear that the most logical outcome of this Journal article is that the Fed tomorrow moves toward a risk propensity toward fighting recession as opposed to a risk propensity weighted toward higher inflation. Which would obviously imply an ease in January.
The problem that I have is, if they were to move to neutral tomorrow, they would wind up in the exact same position. You know, neutral tomorrow and then an ease in January. I guess you could say that moving toward an easing bias tomorrow and then an ease in January is a more definitive statement. But should they move to neutral tomorrow, I know that I and many like me would still think they're heading right toward an ease.
Assuming the Fed knows that, that they appear to be moving toward an easing bias tomorrow, suggests to me there may be some political undertones behind this. I was under the impression that the last bastion of impartiality in this country was the Federal Reserve. And if tomorrow they move to an easing bias when moving to a neutral bias would suffice for the same purpose, I am only left with the conclusion that the Fed may have lost some of its impartiality. You really don't want a political Fed.
The Credibility Question
Bank One deputy chief economist Diane Swonk
I still think it will be a neutral stance, that going to an easing would be a mistake. However, political pressure is building. There is no secret of the bad blood between Greenspan and the Bush family.
It would undermine the Fed's credibility to actually [ease] tomorrow. I don't think it's necessary. And I also think we would see a resumption of economic tightening in the second half of next year once things settle down economically. Especially once we get into the fiscal schemes that Bush is throwing around to stave off recession.
At this stage of the game, the Fed is waiting out an inventory cycle. Growth has slowed as they wanted it to. To ease on that cause alone is not a good reason fundamentally. But politics enter into the equation. Although they're waiting out the cycle, the pressure on Greenspan is going to be enormous.
[A move toward an easing bias] would be surprising. They can get by with a neutral bias. Enough people already feel that there is an ease already priced into the market. I would have a hard time justifying it if I were on the FOMC, but at this point it's a flip of the coin given the political pressures that are starting to float into the equation.
What you're risking is the credibility of the Fed. And let's face it, in the big picture, what really matters? Credibility of the Fed. They don't have a lot of real power out there except for the power they're perceived to have.
Keeping the Options Open
Morgan Stanley Dean Witter chief U.S. fixed income economist David Greenlaw
I think the Fed wants to leave their options open going into tomorrow's meeting. I still think the most likely outcome is just a shift to a neutral stance, but an easing bias is still certainly a possibility, and an outright easing is certainly a remote possibility. I think they just didn't want to have any of those options closed going into the meeting. I don't think the political angle is all that critical, but to some extent that may played a bit of a role.
I think the economy is certainly showing more signs of cooling than at the November meeting, and maybe a little bit more downside since Greenspan's address a couple of weeks ago. To some extent that's natural when you're heading toward a soft landing. Because of that it's going to take some time to determine the downside -- that's why I don't think an easing at this point would make a lot of sense. But the economy is slowing and at some point down the road they may have to come in and provide some stimulus. |
