Fed to Wall Street: Lower rates aren’t the answer now
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The Federal Reserve typically doesn’t like to surprise Wall Street, but it did today: Markets had been betting that policymakers would cut their benchmark short-term interest rate, but instead they stood pat, at 2%.
In their post-meeting statement, Fed Chairman Ben S. Bernanke and peers let us know that they feel the pain of the financial system and the economy -- but they plainly don’t see this as a crisis in need of lower interest rates.
And they have a point: The credit crisis is largely an issue of access to money, not the price. Some companies in need of capital just can’t find investors or lenders at any price -- hence, the fall of Lehman Bros. Holdings Inc.
What’s more, the Fed itself is making plenty of money available to banks and major brokerages via short-term loan programs launched or expanded since spring. It isn’t as if they’re sitting on their hands.
The nut of the Fed’s statement:
Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters.
And it followed that with this, which it might have prefaced, with ‘Nonetheless . . .’:
Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
Financial markets handled their disappointment relatively well. Most U.S. stock indexes were up for the day and the dollar rallied. Treasury bond yields jumped, but from sharply depressed levels on Monday, when investors were rushing for havens.
Some reaction from Wall Street:
--- ‘The Fed decided to buck market expectations. We believe the Fed is correct to try to deal with current credit strains with its special liquidity facilities and the discount window rather than to run short rates down from an already low 2%. The financial system is suffering at the hands of a solvency crisis, which is creating a contraction in credit and a breakdown in financial intermediation. Cutting short rates from the 2% level won’t solve this problem.’ -- Michael Darda, economist at MKM Partners
--- ‘Amid the extraordinary financial events of the last few days, the Fed kept monetary policy on hold. In doing so, the Fed made clear its desire, to the extent possible, to separate its monetary policy decisions from the circumstances surrounding particular financial institutions.’ -- Peter Kretzmer, economist at Bank of America
--- ‘The statement could have largely been written before the events over the past week, which included the practical nationalization of Fannie Mae and Freddie Mac and the demise of one of the largest investment banks and further stress in the financial system. There is no indication that the Fed is preparing the market for a shift in its stance any time soon.’ -- Marc Chandler, currency strategist at Brown Bros. Harriman
--- ‘Wall Street is in danger of sinking, the markets are in freefall, and the Fed refuses to throw us a lifeline. Time will tell if this was the correct course of action. The financial panic and fear of counterparty risk is the highest since the Great Depression, extraordinary measures seem to be called for, yet policymakers are staying the course.’ -- Christopher Rupkey, economist at Bank of Tokyo-Mitsubishi