Sunday, September 09, 2007

Confusion over the Fed

Make no mistake, the Fed is now ready as it always has been ready to cut interest rates if the economy really needs it. That's the catch is that there is a deep disagreement over what the economy needs and even a disagreement over the short-term outlook for the economy. We need to be clear that there is a huge distinction between what the Fed is prepared to do in a hypothetical sense from the perspective of Wall Street and what the Fed is likely to do in any particular situation when judged from the Fed's perspective.

So, when Bernanke and other Fed officials sincerely and genuinely tell as that they are prepared to do whatever it takes to protect the economy, we should be very careful not to blindly conclude that this means that the Fed will necessarily take any particular action in the near-term.

There are a few Fed official speeches scheduled this week. We don't know precisely what these officials will say about the economic outlook or monetary policy, but if they say anything at all about policy, it is likely that they will say that they are prepared to do whatever it takes to protect the economy. The problem will be that any number of traders and commentators on Wall Street are likely to interpret such words as a commitment to cutting the fed funds target rate at the September 18th FOMC meeting even though the Fed may have the opposite perspective.

About the only thing we can hope for is that at least a few financial journalists will act responsibly enough to highlight the disparity between the expectations that the Fed will be setting and the expectations of "the street."

Whether Wall Street honestly believes that there will be a rate cut or they are simply lobbying for a cut is unclear.

It will be quite a battle of the wills playing out over the next few weeks.

-- Jack Krupansky

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