BEN MUST BE REALLY WORRIED ABOUT THE ECONOMY
DON’T ever let them see you sweat!
That’s always good advice, especially if you happen to be monetary policymakers. But in the case of the Federal Reserve, the ring of perspiration is quite noticeable right now.
On Tuesday the Fed gave Wall Street what it wanted – another rate cut – but the dose was apparently not enough for market participants who are desperately trying to maintain their paltry annual gains (and thus bonuses) for another two weeks.
So stock prices fell sharply Tuesday, although – and this is the curious part – not enough at only 294 points, or 2.1 percent, on the Dow Jones index to cause comparisons with any of the great stock market debacles of yesteryear or even for this year.
Still, yesterday there was another development: the Fed had joined hands with European central banks to make $24 billion available on that continent to ease the so-called credit crunch.
Plus, the Fed said it planned four auctions that will add $40 billion in cash to the US market.
This would be the biggest liquidity move since 9/11.
At first the stock market loved the announcement but by the end of the day there was barely a gain.
Rather curious timing.
But, oh, no! sources at the Fed were quick to say to all media outlets listening.
Yesterday’s move to add liquidity to the monetary systems had nothing to do with the disappointing reaction to the quarter-point rate cut the day before.
The addition of liquidity in such an unusually specific way had been in the works for a long time.
And , I believe them.
The Fed had to be nervous – very nervous – long before this week’s interest-rate move met with such scorn.
Part of the disappointment had to do with the fact that Wall Street pundits – who should be filleted and then fired – had caused expectations to rise too high.
A half-percentage point cut in rates, at the very least, was the operative expectation right before the Fed’s move Tuesday.
Wall Street was lucky it got a quarter-point cut, especially after the Fed just weeks before tried to call a halt to rate reductions.
I hate to repeat myself, but here (again) is why rate “cuts” aren’t effective.
As I mentioned in Tuesday’s column, be tween the October rate “cut” and this Fed meeting the 10-year government bond rose to a yield of 4.15 percent from 3.79 percent. The rate on the 30-year government bond has risen comparably.
Those rates did go down modestly earlier this week but Tuesday’s Fed action sent borrowing costs back up sharply.
The big problem is nervousness in Europe and Asia, where economies as well as currencies are doing better than ours.
If that trend continues, interest rates overseas will be more attractive and foreign assets will flee the US – especially if foreigners continue to risk losses because of the weak dollar.
If all that happens, the US will lose control over its own interest rates and economy.
The point is, for months the Fed has found itself with only bad choices.
That’s likely why Fed Chairman Ben Bernanke has been playing down the idea of interest-rate cuts at a time when he should be aggressively making money cheaper.
So it’s not surprising that the Fed is going to Plan B – liquidity injections in coordination with foreign central banks rather than bigger rate cuts.
By now Wall Street should have figured all this out.
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At least Congressman Vito Fossella of Staten Island is thinking straight.
Earlier this week he proposed allowing homeowners with adjustable-rate mortgages who are facing interest-rate resets to withdraw up to $25,000 penalty-free from their retirement accounts to avoid foreclosure.
After all, how secure is your retirement going to be if you are homeless?
Sorry, Vito. But that’s not enough.
As I’ve been proposing in this column forever, Washington should change the tax laws so that anyone can withdraw money penalty-free from their retirement accounts if they invest it in real estate.
With the Fed neutered (see above) and tax cuts out of the question because of federal budget deficits, this is the only chance of sparking some activity in the fading housing market.
By the way, Fossella and I discussed this idea in a meeting earlier this year.