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Why the Markets Dissed the Fed. Again.

By Rob WalkerPosted Wednesday, Aug. 22, 2001, at 3:00 AM ET

Just half an hour before the Federal Open Market Committee made one of its periodic and always much-anticipated interest rate announcements, stocks were slightly up. Soon after the announcement, they fell and finished down on the day—the Dow swung about 200 points from its pre-meeting peak to the closing bell.

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So what were investors upset about this time? In the recent past, the markets have apparently been "disappointed" that rate cuts weren't bigger or more frequent. You could say the markets believed the Fed was being too cautious. But at this point the federal funds rate has fallen all the way to 3.5 percent, as low as it's been since 1994.

Today's wisdom is that the markets think the Fed is being too pessimistic. How so? Well, it's fine that rates got cut another quarter of a percentage point, but what traders were really focused on this time around (the thinking goes) was the short statement that the FOMC makes each time it announces its rate decision. This statement includes the committee's "bias," basically a nonbinding heads up on how it sort of feels about things in general—we might have to cut rates again, we think we won't cut rates next time, our next move is likely to be a rate increase, etc. (The language is less casual than that.)

Apparently the market wanted soothing words: It's OK everybody, the worst is over, we're probably done here, just sit back and let our months of cutting do its magic. That's not what the markets got. The FOMC left open the distinct possibility of cutting rates again. The alarming phrase seems to be this one: "The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future." That is, the worst may not be over.

There's a good chance that this is correct—that there will be more layoffs and shrunken profits and general pain before we start to feel a rebound. Would that be a surprise? I doubt it. It seems likely that most investors right now have the sense that profits aren't going to explode tomorrow morning. So what difference does it make if the Fed basically agrees with them and figures it's best to be prepared for more bad news and ready to act in the face of it? It sounds reasonable enough to me. But I guess what those investors wanted wasn't a reasonable statement, but a hopeful one. Then again, maybe the market would have found a way to disapprove of that sentiment, too. Investors are a mighty tough crowd to please these days.

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COMMENTS

Reader Comments From The Fray:

I have always had a deep respect for Alan Greenspan. He's conscientious, always on-the-job and grossly underpaid. Trying to balance fiscal irresponsibility with a responsible monetary policy is dicey at best. It's a magic act that's running out of bunny rabbits to pull out of the same sorry hat. This time, I fear that it's more like piling Band-Aids on a wound that requires major surgery. I give the patient a 50 / 50 chance of survival.

--B.J.Carper

(To reply, click here.)

Yes, true, we investors are tough crowds. You see we have been bruised by analysts' ratings on tech stocks last year. They said our company's stock would be $200/share by now...it's now $14…We hear about analysts being sued for false statements and making bogus recommendations on stocks they hold. We hear from corporations that use "creative accounting" techniques to make their numbers (and hide the truth from "the street"). We have had analysts tell us there is nothing wrong with P/E's of 600-800! We got market commentators telling us that we should be disappointed by 0.25 rate cut instead of 0.50--even though it is the 4th, 5th, 6th and now 7th cut. What do they know!? They were the boneheads telling us to buy tech stocks at $80 because they were headed for $200 (but, wait they are $14 today...)

It has been said that the average modern investor holds stocks only 10 months compared to "our fathers' investors" who held them for 10 years. We got day traders playing stock prices like slot machines on their online trading account. Yeah, we investors are tough crowds alright. It takes real guts to invest in today's market. I got stock brokers telling me that I need to "hang in there" on my managed accounts--but wait--they fell 40% this year...should I ditch them or hold on? The risk this last year has been enormous. Investors want good news. Investors want truth. Investors want analyst ratings to include terminology like...SELL as well as "strong buy", "buy", "maybe buy", "buy and cross your fingers". The fed is doing what it needs to do to fix the economy, not the stock market. If investors want returns, then buy the companies with earnings and don't sell--hold on and let the buy momentum grow again, it's the only way to get the stock market machine rolling again by creating the wealth effect and confidence in the economy.

--Joe

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