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The Fed Script


The Fed stayed within the standard framework ("Growth, Inflation, Guidance") but went beyond tilting the concern toward slowing growth. Way beyond.

Suffice it to say, I'm glad I didn't actually go golfing on Fed Day. It was a policy that generally worked during Greenspan's days of incrementalism, when we'd go 25-bips atta time in a largely consensus way. Yesterday wasn't about being incremental. It was about a new sheriff. It was about the Bernanke Fed announcing its presence with authority.

The Fed stayed within the standard framework ("Growth, Inflation, Guidance") but went beyond tilting the concern toward slowing growth. Way beyond. The Fed slammed on the gas pedal and all but totally disregarded the idea of braking for inflation. Paragraph #3 of the text (the guidance part, where the Fed scared the bulls last August), was all about growth. It was about a commitment to stimulus, only nodding towards "price stability" at the very end.

The Fed can't really take the word inflation entirely out of a statement but yesterday's release came about as close as possible. The Fed went hunting for Bear in the statement. The addition of a 50-bip cut in the discount window at the end was akin to mounting Boo's head on Ben's wall.

For more analysis on the Fed's rate cut, look at these titles: Red-Eye Randoms: Yesterday's Fed and What's Happening Now; On a Fed Day You Can See Forever; Righting the Economic Ship?

Will it "work"? In the big picture, probably not. In the short-term... well... the best explanation for the sell-off in stocks (meaning: the explanation requiring the fewest words) was seizing credit markets. Seizing credit markets are a function of lack of perceived liquidity.

Perception is only loosely correlated with reality but, at least for now, my perception is that the Fed under Chairman Ben is not going allow liquidity to be a problem. By bailing out Northern Rock, the UK is saying they are on the same page.

You can rage against the long term implications of this unified stance of money dumping but, from where I'm sitting, being short here seems like picking a fight with both the Fed and the tape. I'm inclined to take some profits, fret for the future and wait for lower prices to add more longs to my book but I'm not at all interested in shorting this tape.
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No positions in stocks mentioned.

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