When the Federal Reserve embarked upon its fall campaign of cutting interest rates, I pointed out how there was conflicting economic data on jobs, not to mention the fact that the Fed watches inflation through the fantasy-world "core" figure, which ignores all the stuff that makes life more expensive these day.
In fact, the key employment data point upon which the decision was reportedly made (a poor jobs report) was shortly thereafter reversed. Instead, after the last cut, I suspected -- and I was not the only one -- that Bernanke and the Fed were simply doing exactly what the markets expected, only because the markets expected it.
Pander by numbers
Well, there's not much doubt left. The release of the last meeting's minutes shows that a key motivation in the interest rate cut was indeed to soothe the jittery markets. It was, as I see it, the monetary policy equivalent of a back rub, complete with calming aromatherapy and piped-in whale calls.
Here's what the Fed's sanitized "minutes" have to say about it: "Many members were concerned about the still-sensitive state of financial markets and thought that an easing policy would help support improvements in market functioning thereby mitigating some of the downside risks to economic growth."
In other words, they didn't want to upset the financial markets -- which expected that rate cut -- lest it cause trouble. This betrays a couple of uncomfortable truths about our current Fed ... I hesitate to use the term "leadership," as that implies a sense of mission and a modicum of backbone.
Substandard stewards
First of all, the current Fed stewards have exacerbated the marketwide moral hazard begun by Greenspan, tossing money onto the markets every time they look set to correct. What Easy Al and Back-Rub Ben have taught speculators is that there's no need to worry too much about risk. If things look scary, Uncle Sam will just crank up the printing press and give Wall Street a hot buck injection.
More worrying to me is that second remark, the one about markets "mitigating" risks to downside growth. This suggests to me that Back-Rub Ben and the Feel-Good Fed think they can bubble their way out of trouble again.
Unintended consequences
Not going to happen. The ironic reality is that Bernanke and his short-sighted comfort cohorts killed the markets with their kindness. There was a momentary pop in stocks, but since then, it's been a slaughter. Traders began to suspect that the Fed might finally have to quit with the back rubs, and longer-term investors seem now to realize that no amount of Fed cutting could repair the damaged credit markets. That caused a crisis in confidence, engendered by years of shoddy mortgage lending and securitization by everyone from Countrywide Financial (NYSE:CFC) to Citigroup (NYSE:C), Wachovia (NYSE:WB), and Freddie Mac (NYSE:FRE). With banks unwilling to lend as easily, and unable to be as free with the cash, as their bad loans pinch capital requirements, much of that "cheap" market looked anything but.
Foolish final thought
Moreover, the easy money policy, combined with a global realization that U.S. mortgage-backed securities are more suited for restroom cleanup than investment, has started a steady run on the dollar. That's having the effect of inflating commodities, especially oil, in dollar terms, a situation that has the real potential to clobber consumer spending and crimp corporate profits.
Think the prices of oil, steel, copper, aluminum, and other commodities don't matter? Watch the verbiage coming out of companies like FedEx (NYSE:FDX), GM (NYSE:GM), and Wal-Mart (NYSE:WMT). There are plenty of indications that Americans won't and can't be as free with their spending as they have been in the past. Depending on how tight they get with their bucks, a lot of stocks could be cruising for a bruising.
For more coverage of Bernanke's cavalcade of folly:
