We're taking this game back.
That seemed to be the message from the US Federal Reserve's decision to surprise the world with a rate cut outside of its policy meetings, the second such move this year. Weeks of watching the economy tumble, stocks slide and pundits criticizing him for not lowering rates fast enough were too much for Fed Chairman Alan Greenspan. He knew he'd lost control of the economy and the spin about its outlook.
Wednesday, the Fed grabbed the ball back from Wall Street and its pundits and rolled up its sleeves to stabilize the world's largest economy.
"If there were ever a surprise, this is it," says Ian Shepherdson, chief US economist at High Frequency Economics in Valhalla, New York.
The Federal Open Market Committee's move to cut its benchmark interest rate a half percentage point to 4.5 percent didn't reek of panic, as did its Jan. 3 rate cut. Rather, policy makers characterized their inter-FOMC-meeting cut as a catch-up move. In recent weeks, weak activity in stock and bond markets that trade at a spread to US Treasuries offered Fed officials plenty of insight into the economy's mounting slowdown. And the Fed listened. It held an impromptu conference call and pumped more credit into the slumping economy.
What Did They Know?
It's still likely the FOMC will trim borrowing costs on May 15, when the FOMC meets. The Greenspan Fed hates moving between FOMC meetings. Its decision to do so anyway indicates the central bank is worried the slowdown may be deeper and more prolonged than earlier expected.
While another move depends on the tenor of economic data between now and then, the FOMC's statement Wednesday that the "risks are weighted mainly toward conditions that may generate economic weakness" is suggestion enough that lower rates are on the way.
Such expectations pushed stock prices up and Treasury yields down.
What drove the FOMC's action isn't clear. The surprising action will no doubt spawn weeks of what-did-the-Fed-know-that-we-didn't speculation and conspiracy theories. But one can surmise that Greenspan & Co wanted to grab back control of the economy -- and perceptions about it. "It's the economy, stupid," says Tim Rogers, chief economist at Briefing.com in Boston.
In its statement, the FOMC pointed to slowing business investment and falling corporate profits. While the nation's inventory correction is working its way through, Rogers says, the "popped equity and business investment bubbles" leave a profit recession, which has slowed investment and the manufacturing sector it drives.
The deflating of the equity bubble hits consumer spending like the investment bubble that has soured the outlook for business investment. The combined forces have finally pulled the consumer into the economic slump. That, as history has shown, spells recession unless the Fed gets far more aggressive.
The central bank did just that Wednesday. It also was the second time this year it implicitly admitted it had made a mistake. The Jan. 3 move came two weeks after the FOMC opted not to cut rates.
Moreover, the rate cut came just weeks after the Fed finally conceded that inflation was less of a risk than recession. No sooner did the Fed end its Jan. 30 to Jan. 31 meeting than investors began criticizing it for being behind the curve.
Wall Street Surprised
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