As I turned on CNBC before the market open this morning and continued to read and watch what people were saying, I began to realize that there was a lot more expectation for a 50 basis point cut than I had realized. I had put the chance of a 50 point cut around 20% but market particpants overall seemed to put it higher, say around 30-33%.
And then, after turning negative mid-morning, stocks started to turn up as the Fed decision grew closer. It was almost as if the market was expecting/signalling a 50 point cut.
The question I asked myself is: Do market players KNOW something I don’t know? (which is always possible) Or has OPTIMISIM and EUPHORIA gotten a little out of control?
I ended up thinking it was the latter because I just can’t imagine the Fed would leak its plans and intentions in any way, to anybody. That would just be so damaging. So that meant the move in the hour leading up to the decision was possibly a sign of overflowing optimism and hope. It was a sign of frothiness.
Let it be said that while this was the conclusion I came to in my mind, I was wracked with anxiety that I might be wrong.
And that turned out to be right as Bernanke and company put their foot down, cutting the Fed Funds Rate by 25 basis points, the Discount Rate by 25 and, crucially, leaving the policy bias on “neutral” (Dec 11 FOMC Statement).
Turning to the statement:
In the first paragraph on the economy the FOMC conceded that “strains in financial markets have increased in recent weeks” compared to “eased somewhat on balance” (Oct 31) last time. They also said that growth was slowing due to “the intensification of the housing correction” (SAME), but added this time “and some softening in business and consumer spending”.
The paragraph on inflation is pretty much identical.
The policy statement says that recent developments have “increased the uncertainty surrounding the outlook for economic growth and inflation” compared with “the upside risks to inflation roughly balance the downside risks to growth”.
What stands out is their use of the word “uncertainty”. In the past statement they seem to feel like they have a handle on the risks, and that the risks to inflation and growth are balanced equally. Now, things are a bit more in flux, and there are risks to inflation and to growth that are harder to get a handle on.
This is not what the bulls were looking for. In fact, not only did it fail to give them what they hoped for. It even came up a little short in terms of what they expected.
Markets are selling off badly (Dow -195, S&P -24, Nasdaq -40) (1 Day Chart).
Cramer is on CNBC right now saying that Bernanke and Co. are “academics”, that they “don’t get it”, etc..
But I applaud Bernanke’s decision – and not just because I’m profiting from it.
At some point, you have to protect the currency, on which the entire global financial system depends, and take some short term pain for long term gain. You have to let the excesses of the boom work themselves out.
Most people could care less about the long term – until it arrives. But it is the responsibility of those in authority, who are there for a reason, to make the right decisions, even when doing so is not easy or popular.
I applaud Ben Bernanke for his backbone.