There is a story going around that SocGen caused the major European sell-off last Monday to cover the trades from their rogue trader. If this is true, the Fed may have reacted with a 75 bps rate cut to an isolated one-time price pressure event. The Fed may have panicked and now we are left with determining what they will do this week. In an attempt to regain strength and creditability they may do nothing and hold rates steady. They took their rate cut earlier.
A policy issue is what information was in the inflation and economic numbers to cause the Fed to take some action inter-meeting. There were no economic announcements on that Monday except the Richmond Fed manufacturing index. In fact, the economic news on the previous Friday was also light with leading indicators coming in less then expected but Michigan consumer confidence actually higher than expected. The big news was the Philadelphia Fed survey numbers which plummeted on Thursday. This still leaves the question of why there was an emergency phone meeting to cut on Monday.
Clearly, the Fed may need to provide liquidity during tight credit situations but the cut came before the US markets opened. As a market participant, there was clear worry about what would happen to the US stock market, but part of this concern was based on uncertainty. It was not clear what was causing the selling pressure. It should be assumed that the Fed would be able to get a better read on what traders are thinking and that this information would be used to help with their decision-making. So what did they know?
Clearly, the Fed may need to provide liquidity during tight credit situations but the cut came before the US markets opened. As a market participant, there was clear worry about what would happen to the US stock market, but part of this concern was based on uncertainty. It was not clear what was causing the selling pressure. It should be assumed that the Fed would be able to get a better read on what traders are thinking and that this information would be used to help with their decision-making. So what did they know?
The Fed announcement never mentioned the equity selling pressure as a cause for the rate cut. The Fed either was uninformed or over-reacted. Of course, it could be argued that they knew the selling pressure was coming from SocGen and they were concerned about market perception. We will not know. This is not a normal way of handling monetary policy and will affect the market's perception at the current meeting. What type of Fed are we dealing with?
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