Wednesday, June 25, 2008

The Folly of Fed Policy

Today, the Federal Open Market Committee (FOMC) of the Federal Reserve determined to leave federal funds rates without change, at 2%.

If the previous statement sounds like a lot of words to say essentially nothing, then count yourself among the lucky few who have learned not to pay too much attention to the moves, machinations and pronouncements of the Federal Reserve.

Essentially, the Fed took two days this week to decide to do... nothing. It's nice work if you can get it, but some of us who have to endure the anticipation of and reporting upon the 8 scheduled meetings a year wish they would do nothing more often, because nothing is usually what they - in the long run - accomplish.

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Consider today's decision to be the end of a sometimes dramatic cascade of interest rate reductions, which took the federal funds rate from 5.25 to the current 2.00% from September, 2007 through the present in a series of 10 statements, four of which were unscheduled.

Since September, 2007, the stock markets have done nothing more than deteriorate, prices have gone up (oil and gas have doubled in price) and the US economy is in no better shape than 9 months ago. By many accounts, we are worse off, and the value of the US dollar, measured against almost any other currency, has weakened.

So, excuse me for thinking that the Fed is full of nothing more than a lot of hot air.

Still, they have many followers and believers that they can accomplish much, when, in fact, the complexity and nuances of the global economy are far beyond their control.

They really ought to just set a rate and leave it relatively unchanged for long, long periods of time. 5% ought to be about right for what member banks charge other institutions. It shouldn't waver too far from that point, providing stability and security to markets. A policy along those lines would be far more improved and safer than the up-and-down we've come to know and loathe since the Volker years.

Dow 11,811.83 +4.40; NASDAQ 2,401.26 +32.98; S&P 500 1,321.98 +7.69; NYSE Composite 8,865.80 +62.46

Stocks were mostly higher prior to the announcement at 2:15 pm, and lost ground thereafter, which was somewhat expected, considering that the Fed is essentially saying, "We're done cutting rates for now, as that didn't work, so we're going to sit back and wait and watch." Actually, the markets should have exploded upward as the Fed admits powerlessness. It was, after all, pretty good news.

Markets responded in a fairly positive manner overall, or maybe they were just in a technically oversold condition, short term. Advancing issues finally took command over decliners, 4225-2059, while new lows continued to track ahead of new highs, but not by as large a margin, 376-69.

Commodities were lower, with oil down $2.45, at $134.55. Gold fell $9.30, to $882.30, while silver lost 13 cents, at $16.61 the ounce.

The decline in commodities continues unabated, with the notable exception of oil, but even that may have topped out already. A further slowdown in commodities markets may be signs that the recession is real and growing globally.

CNBC analyst Jim Goldman opined today about the Yahoo-Microsoft merger rumors which resurfaced, rather suspiciously, yesterday. Yahoo finished at 22.00 today, but it should be noted, especially by federal investigators and regulators, that it was trading at 20.70 before the latest rumor surfaced. Neither Yahoo nor Microsoft has confirmed that talks are back on, making this episode mighty questionable.

The markets are still highly unstable. The Dow lost 112 points in just the final hour, once all the gyrations following the Fed decision had played out.

NYSE Volume 1,261,685,000
NASDAQ Volume 2,135,660,000

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