Testing Faith in the Fed
BusinessWeek - January 30, 2008, 6:20PM EST
Financial bloggers wonder whether the Fed is making the right moves to alleviate credit pressures by Karyn McCormack
The Federal Reserve has been widely criticized for sitting on its hands while the subprime mortgage and credit problems worsened. Now, after the 50-basis-point cut in the federal funds rate at the Fed's scheduled policy meeting on Jan. 30, on top of the emergency 75-basis-point reduction on Jan. 22 in reaction to a broad global market sell-off, bloggers still question whether the Fed is on top of the game.
"There will be some who wonder whether or not the Fed is misreading economic and market conditions," wrote John Carney at DealBreaker after poring over the Fed's statement. "Still, it's the cut [the] market wanted."
Noting that Fed funds futures have been jumping all over the place in the last two weeks, Carney says "the Fed has become a lot less predictable, at least on any long-term basis."
The Market Remains Unimpressed
The market usually gains ground on a Fed meeting day, according to a chart from Bespoke Investment Group's Think B.I.G. But on Jan. 30, it looks like investors lost faith in the Fed rally rather quickly. Just before the announcement, the Dow Jones industrial average was down about 30 points. It shot up as much as 201 points after the decision, but then reversed and ended the day down 37 points, at 12,442.83, amid a sell-off in financial stocks.
That's because many experts and investors are still deeply worried about the economy slipping into a recession—and what the Fed will do next. Seeking Alpha compiled comments from a few economists and experts after the cut—but some weren't so positive: "The Federal Reserve is panicking and they have been panicking for the past 10 days—we have gotten 125 basis points," wrote Jeffrey Gundlach, the highly regarded fixed-income manager at TCW Group. "It's too late to help the housing market…. The time to do this was back in August before you allowed a culture of defaults to develop between media saturation of upcoming reset problems and political grandstanding."
"Dear Ben" Letter
Leading up to the Fed decision, a few blogs polled readers for predictions. DealBreaker found that most readers thought a 25-basis-point cut was likely. But just two days earlier, they called for 50 basis points. Think B.I.G. asked readers what they thought the Fed would do and should do. While most predicted that the Fed would indeed cut rates by 50 basis points, a majority thought the Fed should say put.
Barry Ritholtz at The Big Picture offers a little solace and self-help in his letter to Bernanke."If it is any consolation, most of it is not your fault," Ritholtz wrote. "You inherited a mess from Easy Al." He offers the chief a list of things to consider and concludes with: "I wish you luck in resolving some of the weighty issues facing our economy. You are going to need it."
McCormack is senior producer for BusinessWeek.com's Investing channel .