Fed's message to market: Clear as mud
Posted
Oct 31 2007, 05:23 PM
by
allant
Rating:
Here's MSN Money Columnist Jim Jubak's take on the Fed's move:
If you were looking for the Federal Reserve to set a clear direction for Wall Street and the economy, think again.
Wall Street got the Fed rate cut it wanted and then couldn't decide if it was really happy about it. The stock market got exactly the quarter percentage point cut in short-term interest rates from the Federal Reserve that it had been hoping for. The argument on Wall Street was that the Fed had to cut because the U.S. economy was slowing and needed a rate cut to prevent it from slipping into recession. The Fed bought into that logic by stressing that the housing market correction was still intensifying and that financial markets were still in disarray. Another cut would help insure that the damage wouldn't take down the entire economy.
But the market can't have been too pleased with the Federal Reserve's Open Market Committees renewed emphasis on the dangers of inflation. "Readings on core inflation," the committee wrote, "have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation and that the economy."
It sure sounded like the Fed was moving to give itself room not to cut again when it next meets in December. At least the financial markets interpreted it that way -- at first. Immediately after the interest rate cut, the Fed funds futures market saw a drop in the odds of a December cut from 64% to 52%. With an increased chance that this would be the last cut in 2007, investors who had bought into inflation hedges such as gold and who had bid up shares of home builders in a belief that the Fed would ride -- and ride repeatedly -- to the rescue took profits in the minutes after the Fed spoke.
But then, after selling off, the market and gold reversed course with stocks regaining all they'd lost and gold climbing to $800 in the half hour to three o'clock. On a few minutes reflection, I guess, investors decided that the Federal Reserve really was more worried about the economy than about fighting inflation. And that another rate cut in 2007 wasn't off the table after all. Tune in in December.
