Sunday, May 06, 2007

Disconnect between many market participants and the Fed

After all these years and countless reports and speeches and media coverage, one would think that the people on Wall Street and in the media would finally understand what the Fed does and how they think. Nope. It simply hasn't happened. And probably never will. There is a dramatic disconect between the Fed and many Wall Street market participants and even the financial media. For example, I was reading a summary of the market action on Friday, and ran across this "gem" of market/media "wisdom":

… investors try to determine whether an inflation-wary Federal Reserve will become comfortable enough later in the year to lower short-term interest rates.

Anybody who actually believes that comfort with inflation would lead the Fed to cut rates is seriosuly out of touch with what the Fed itself has made clear to markets and the media. The current Fed funds target rate (5.25%) is in the neutral range, neither accommodative nor restrictive. The idea is that the Fed rate will stay right where it is unless either inflation fails to decline further and the Fed rate needs to rise, or the economy weakens significantly enough to warrant a cut. To be clear, the Fed rate is not restrictive. Any "slowing" of the economy is due to the Fed rate no longer being accommodative. In other words, the "easy" money has dried up to some extent (but not completely.)

-- Jack Krupansky


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