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2 Bernanke: Don't take me for
granted, boys By Julian
Delasantellis
For this Halloween, it seems
that US Federal Reserve chairman Ben Bernanke
chose to dress up as Betty "Riz" Rizzo, the young
social outcast in the 1978 film Grease.
Riz sings a song of remorse, expressing
outward pride but inner shame over being the girl
the 1950s boys know they can go to
when
they want an assured good time:
There are worse things I could
do, Than go with a boy or two. Even though
the neighborhood thinks I'm trashy, And no
good, I suppose it could be true, But
there are worse things I could do.
I
could flirt with all the guys, Smile at them
and bat my eyes. Press against them when we
dance, Make them think they stand a
chance, Then refuse to see it
through. That's a thing I'd never
do.
Picture Bernanke, with signature
form-fitting black pedal pusher pants, teased
hair, hot pink lipstick, and a tight, "Pink
Ladies" girl gang leather jacket, going trick or
treating at Wednesday's Federal Open Market
Committee meeting, singing a song of his own
individual professional conflict between values
and popularity:
There are worse things I could
do Than lower an interest rate or two
...
For the third time in the last 75
days, the US Federal Reserve has made a major move
to lower interest rates in order to attempt to
revive a US economy whose future prospects are
looking ever bleaker with each successive economic
report.
This move involved a cut of 0.25%,
or 25 basis points in money market lingo, in the
Federal Funds target rate, to 4.50%; there was
also an accompanying 25 basis point cut in the
Federal Reserve Discount rate, the interest rate
the Fed charges member banks who must borrow from
it due to the fact that they have been denied
funding at reasonable rates from the private,
commercial money markets.
In total, since
this current easing rate cycle began on August 17,
the discount rate has now been cut a total of 125
basis points, and the Federal Funds rate by 75. US
Federal Reserve rate moves usually come in
successive series, called cycles, in the same
direction, that can last many months or years.
There is every indication that due to economic
weakness arising from a crippled housing sector,
the US is now in the early stages of a new rate
cutting cycle, one that we will not see the end of
until at least early 2009, perhaps even beyond
that.
Unlike the previous Fed move on
September 18, when the markets were surprised with
stronger than expected twin 50-point cuts of both
the Fed Funds target rate and the discount rate,
this move was pretty well expected and discounted
by the markets prior to the meeting.
In
the recent past, during the Alan Greenspan Federal
Reserve era, having a predictable Fed was seen as
a positive value, something that America's central
bank should strive for. There are indications that
this policy objective - predictability, or, in
market lingo, transparency - is losing favor as a
core Fed institutional virtue, and that puts us in
the international community of Federal Reserve
watchers; indeed, it puts the entire financial
world in a wholly new situation.
In an
article posted on the Financial Times website,
"Fed concern at expectation of rate cut", on
October 28, Krishna Guna reported that being a bit
too loose with the boys in the financial markets
was emerging as a major policy concern with the
Bernanke Fed board.
"According to
anecdotal reports, there is some resistance among
Fed insiders to the notion of a guaranteed rate
cut. Many would have preferred to go into the
meeting with market odds more evenly balanced,
which would give the central bank greater latitude
to make its determination without risking market
turmoil."
Since at least the opening years
of the Alan Greenspan Fed in the early 1990s, the
results of the regularly scheduled Federal Reserve
meetings have rarely been much of a surprise.
Invariably, a few days before the meeting, you'd
see stories in the financial media about "Fed
insiders" or "highly placed Fed sources" in
essence telling the world what the outcome of the
meeting would be.
The "Fed insiders" and
"highly placed Fed sources" were, of course, Fed
officials close to Greenspan; these stories were,
in a Washington tradition that probably predates
Pierre L'Enfant's arrival in the city to design
it, leaks. The leakers did not have to, like Bob
Woodward's Watergate era "Deep Throat", meet the
reporter in the wee hours in an empty car park;
since Greenspan obviously fully approved the
procedure, the source probably got some good
whiskey and a steak dinner for this valued service
to the Fifth Estate.
Greenspan endorsed
this dance of the seven Fed veils because he
believed that unpredictability carried a cost to
the general economy. Unpredictable and unexpected
Federal Reserve moves were invariably followed by
large concomitant movements in the financial
markets. If you are a participant in the markets,
whether it be a buyer or seller of stocks, bonds
or commodities, your life is made infinitely more
complex if you have to provide and plan for
regularly expected potential 3-5% moves, in either
direction, in your market, rather than more sedate
1% moves.
You can go into the options
markets and take out "insurance", buying puts and
calls, against extreme market moves, but that
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