Fed pretends to be hawkish, no one believes them
Wow, what a shocker! The Fed cut interest rates. I guess no one was predicting that one. The more interesting news is the market's reaction to their statement:
The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.
Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.
Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.
So, we are supposed to take this change in statement as an indication that the Fed is now being "vigilant" on inflation and won't be destroying our currency quite as quickly in the near future... at least that's what the CNBC "experts" were telling us.
Now, if the Fed was truly becoming more hawkish and markets believed them, we would expect the following reaction:
- Gold down
- Dollar up/Euro down
- Stocks down
Instead, we go the exact opposite on all these fronts. Has Bernanke already lost all credibility this early into his tenure?
This reaction doesn't bode well for future inflation in our opinion. If the Fed has already lost control of the market's perception of them as an inflation fighter, we could be royally screwed.
Thanks Ben. Thanks a lot.
