After the ECB makes strong comments on the worries of inflation and the potential for tightening action in spite of the European credit problems, Fed chairman Bernanke sends the signal that more rate cuts are needed. The US economy is slowing and the Fed is worried about growth not inflation. He stated that “we stand ready to take substantive additional action… to counter any adverse dynamics that might threaten economic or financial stability”.
As commented before from one friend, “The helicopters are warming up on the tarmac… get ready for the money.” The stock market reaction was quick, it loves money. The bond vigilantes are back and hit the debt market hard. The dollar sold off. What happened to the much talked about Fed projections and forecasting power? It seems like the new transparency and forecasting policies have been thrown out the window which hurts Fed credibility.
We should not be surprised that the Fed would move to lower rates given all of the headline risk about the poor economy. The forum for this announcement is the problem, not that there is anything wrong with the Women in Housing and Finance and Exchequer Club Joint Luncheon. Unfortunately, running monetary policy through speeches and making pronouncement without the FOMC diminishes the stated objective of trying to provide more transparency. This type of policy forces the markets to look more closely at every speech and increases the chances of for inter-meeting moves. All of this adds to market uncertainty which is not what anyone should want. What happens if the rates cuts do not keep coming after the Chairman states that they are needed?
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