Posted by: Aaron Pressman on September 19, 2007
Okay, as promised, here’s some annotated linkage from around the web analyzing yesterday’s surprisingly large rate cuts by the Federal Reserve’s Open Market Committee. For context, the stock market appeared pretty bowled over by Chairman Ben Bernanke’s one-half percentage point cuts to the discount rate and fed funds rate. The S&P 500 ended with a gain of almost 3% after the cuts were announced. Bond investors took things more in stride with the yield on the 10-year Treasury note barely moving. My colleague, Peter Coy, offers his take on our site today.
Just how shocking was the half-percentage point cut? Arizona money manager and blogger Roger Nusbaum used this picture to summarize the market’s reaction:
For more serious analysis, a good place to start is at trader and former college professor Jeffrey Miller’s blog, A Dash of Insight. Miller urges investors to stop trying to out-think the Fed and ignore much of the critical commentary. “We are amazed — almost daily — by the barrage of Fed commentary by those with little expertise,” he writes today. “Apparently it makes the pundit seem sophisticated to talk about ‘Greenie’ or ‘Uncle Ben’ or ‘Helicopter Ben’ or such. Meanwhile, those who actually read and study the Fed have an advantage.” Based on his analysis, the Fed is likely to pull through and stocks look attractive.
To appreciate the opposite point of view, go immediately to Fed critic and NYU professor Nouriel Roubini’s blog, RGE Monitor. Roubini says yesterday’s cuts were the correct move but are likely to be too late and ineffective to save the economy. “The Fed argued for too long that the housing recession would ‘bottom out’, that its spillovers to other sectors and to private consumption would be ‘modest’, and that the subprime problem was a ‘niche’ and ‘contained’ problem,” he writes. “Now the economic and financial facts have forced it to play catch up with reality.”
The bond trader who writes the fixed-income oriented blog Accrued Interest sees a different scenario playing out. He expects the Fed to cut rates a little bit more but then reverse course and raise them again once the dangers of the credit crunch are resolved. “This is what happened in 1999,” he explains. “After the Fed cut 3 times in 1998, it took all those cuts back and then some in 1999, and rate product had a terrible year. That’s my outlook for the next 2-6 quarters.” For bond investors, that means staying in short maturity securities and even mortgage-backed securities that benefit when rates rise a bit.
One reason so many were surprised by the magnitude of yesterday’s rate cuts was because Fed officials had seemingly talked up a more conservative strategy over the previous few weeks. That leads money manager David Merkel, author of the excellent Aleph Blog, to an important conclusion about following the Fed going foward. Under Bernanke, the central bank’s interest rate setting committee “really isn’t interested in transparency,” Merkel writes.
Finally, some people are known as perma-bears for a reason. The thinking of these most bearish of analysts is that the whole bubble problem started because the Fed kept interest rates too low for too long making all manner of speculation and borrowing too easy. Rate cuts now not only let the bubblizers off the hook, they allow the bubble to grow even larger and more dangerous. In this Bloomberg article, commodities expert Jim Rogers says Fed rate cuts aren’t just useless — they will actually make things worse. “If Bernanke starts running those printing presses even faster than he’s doing already, yes we are going to have a serious recession,” Rogers told Bloomberg. “The dollar’s going to collapse, the bond market’s going to collapse. There’s going to be a lot of problems in the U.S.” Marc Faber, another well-known bearish money manager, put it even more succinctly: “It’s suicidal to cut interest rates.”