Cyrillic Partners

The Federal Reserve fell short on Wall Street’s expectations Tuesday, dropping rates a mere quarter point instead of the half-point businesspeople were clamoring for.

It highlights a problem of expectations. When the market expects the Fed to make a certain move and it makes that move, there’s a disappointment that it didn’t go further. It’s almost as if the more the market knows about the Fed is going to do, the less it actually responds to the stimulus.

So why then does the Fed pushing to publish even more information on its actions? We called it “a subtle way to take power away from the various would-be prognosticators by publishing even more information. It makes the black box of the economy look a little less opaque,” when we wrote about the Fed plan to increase the number of times it publishes its projections (read the story).

But there’s something else going on here too. It’s almost as if Bernanke et al want to calm everybody down. It’s like Wall Street is an scared cat that needs a little gentle stroking to get the jitters out.

The action dovetails with a speech Federal Reserve Governor Frederic Mishkin made last month. We titled our article on it Fed Gov. Says “Sorry Wall St.” because it seemed as if the FOMC didn’t care about the immediate ups and downs on Wall Street. They, it seems, are focused on “fundamentals” and long-term stability. From Mishkin’s speech: “Especially in very recent years, investors appeared to be less concerned about macroeconomic uncertainty or about the attendant problems of adverse selection and moral hazard inherent in asset-backed products.”

Market volatility has no doubt increased over the last decade. But it’s not just about bizarre securitization of ill-understood products. The rise of hedge funds has played a role as well. Most hedge funds only make money when the market has big swings, so volatility is their best friend. They love the jittery cat and would pull it’s tail all day long.

This cut demonstrates that the Fed has taken on a new role. It’s no longer just trying to fight inflation or balance and sustain growth. It is trying to fight volatility, calm down a jittery market. Mellow everyone out.

[Image from PictureQuest.com]

Trackback URI | Comments RSS