The latest move also suggests policy makers realized their critics had a point. Fed officials were out in force in recent weeks trying to give the economy a verbal boost with positive chatter about the growth outlook. Yet the Fed's efforts to talk up the economy didn't jibe with data showing that everything from employment to manufacturing activity to household wealth to consumer confidence was worsening. The latest rate move showed the Fed understands that now.
If it was looking to surprise Wall Street, the central bank succeeded. According to Raymond Stone, a managing director at Stone & McCarthy Research Associates in Princeton, the bond market was more surprised by Wednesday's rate cut than it's been by the central bank in 11 years. Here's why. The "Fed-speak" of late diminished the odds of an inter- meeting rate cut. So did the complexion of economic data; at the margin, recent figures actually appeared more upbeat. When the Fed only lowered the federal funds rate by 50 basis points on March 20, a sense of disappointment swept the bond market. At the time, Stone says, the reaction in bond futures markets suggested traders and investors were as disappointed as they'd been by the Fed in over a decade. "[Wednesday's] easing on the other hand was the most pleasant surprise over the period," Stone says.
Winning points
The Fed even won points for execution. Its move had a Rubin-esque quality to it. As Treasury secretary, Robert Rubin had an uncanny sense of market timing when intervening in currency markets. Rubin would wait until markets turned a certain direction on their own and enter the market to capitalize on -- and exacerbate -- a move that already had a basis in fundamentals. The Fed's action Wednesday almost seemed to be executed by the New York Fed's foreign exchange desk. The thinking, presumably, was that the Fed would get more mileage out of an unexpected action, one that would catch investors, consumers and businesses off guard.
Far less surprising will be another Fed rate cut on May 15.
If the economy continues to show signs of improvement, the FOMC may opt for a less aggressive one-quarter percentage-point move. Still, the Fed isn't done stimulating the economy and the rallies in bonds and stocks suggest investors agree. "Policy makers are not willing to tolerate growth below the economy's potential," says Michael Moran, chief economist at Daiwa Securities America Inc in New York.
The slowing global economy is another reason to expect more cuts. The FOMC Wednesday mentioned the "risk of slower growth abroad," which observers read as a veiled reference to the institution's role as central bank of the world. Greenspan & Co makes decisions based on US trends, but mounting economic problems in Asia and Latin America are a cause for concern in Washington. So is Japan's failure to stabilize the world's second largest economy and the European Central Bank's reluctance to cut rates to boost euro zone economies. The Fed is showing the world it's still got game. Let's hope it keeps its eyes on the ball and cuts rates again if needed.
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