To: Les H who wrote (102360 ) 5/15/2001 3:03:42 PM From: Les H Read Replies (2) | Respond to The Fed’s 50 basis point rate cut met expectations but there were surprises nonetheless. First, to placate worried bond investors, the Fed tried to assuage concerns that their aggressive rate cuts might eventually stoke inflation by briefly highlighting the inflation outlook. Bond yields have recently vaulted to 6-month highs owing mostly to concerns about the Fed’s aggressiveness. To counter this concern, the Fed inserted this brief remark on the inflation outlook: “With pressures on labor and product markets easing, inflation is expected to remain contained.” Today was the first time this year that the Fed mentioned inflation in their policy statement. This makes the insertion of the inflation language all the more telling, especially with inflation accelerating. The only ration conclusion, therefore, for the insertion of the reference to inflation is that it is a clear, distinct attempt by the Fed to try to calm growing inflation fears in the bond market. But history has proven that the bond market gives more weight to the Fed’s actions than their words. The bond market was hoping for language that might indicate the pace of rate cuts might slow going forward. But there is no such indication in the Fed’s statement. So the Fed’s attempt to calm the bond market’s anxieties is likely to fall on deaf ears for now. The second surprise was that only 5 of the Fed’s 12 district backs requested a cut in the discount rate, which was also lowered a half-point to 3.50%. That was the fewest number of banks to request a rate cut this year. This might suggest that sentiment amongst the regional central banks for additional rate cuts might be waning somewhat. The five banks that requested the cut were: the Federal Reserve Banks of New York, Richmond, Chicago, St. Louis and San Francisco. A third surprise that the markets hoped might be addressed was the Fed’s comment on productivity. The Fed’s statement indicates that the Fed sees continued strong growth in productivity: "Although measured productivity growth stalled in the first quarter, the impressive underlying rate of increase that developed in recent years appears to be largely intact, supporting longer-term prospects."
