Was the Fed Tricked?

If you’ve missed it, this is the big story today. It’s pretty funny, at least for me. I’m sick like that.

When the Federal Reserve surprised markets with a 0.75 percentage-point cut in the federal-funds target Tuesday morning, the thinking was that concerns about a U.S. recession had so fully enveloped the markets that just about anything could happen. Sure, the thinking went, the Fed was in danger of looking like it had responded to market action rather than an economic report, but if markets were reacting to economic reports, well, it’s all the same in this world these days.

However.

The revelation that Societe Generale is taking a $7 billion write-down due to the activities of one rogue trader — and additional reports that the French bank may have been unwinding those positions on Monday, a thinly traded, volatile day when Asian and European markets were rocked with losses, puts the Fed’s move in a new light. Namely, that they were taken in.

The answer of course, is yes – they were. And it serves them bloody right, but not us. The Fed’s job is to know that this sort of thing is going on – not see equities being pummeled and jump in to bail them out. It’s our Money Supply and the stability of our prices. Stewardship of these things is the Fed’s responsibility.

Hence, we quickly learn what sheer folly and utter irresponsibility it is for the Fed to use its limited ammunition to intervene in equity prices. Their panicky rate cute were not to insure the smooth functioning of the markets, but rather, to guarantee prices.

As we have been saying for the past two days, this is not the Fed’s charge. They are supposed to be maintaining price stability (fighting inflation) and maximizing employment (supporting growth) — NOT guaranteeing stock prices.

Tuesday’s panicked 75 basis cut will prove to be an historical embarrassment, a blot on the Fed for all its days. Failing to understand what their responsibilities are is bad enough; allowing themselves to be bossed around by Futures traders is inexcusable.

And, having been rewarded for their past tantrums, the market will now be screaming for another 75 bps next week. As Rick Santelli appropriately observed, the Pavlonian training is now complete.

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2 comments so far

  1. oxymoron33 on

    I do not see the why or the how that the Fed cut the rate. The decrease makes little sense to me. WWGD what would Greenspan do?

  2. zooeygoethe on

    Heh. You mean besides call Bernanke and beg his forgiveness for the God-awful mess that he left?


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