"Excess productive capacity has emerged recently. The possibility that this excess could continue for some time and the potential for weakness in global economic conditions suggest substantial risks that demand and production could remain soft," the Fed said in its statement. Translation: We're not back on the upswing yet but we're not tumbling into the abyss either.
The stock markets, disagreeing somewhat with that assessment, staged the expected knee-jerk sell-off at the news. It probably won't amount to much this was still the third straight half-point cut since January, and that's aggressive easing by any measure. Besides, how much can these beaten-up markets really sell off on something they saw coming a mile away?
Whither the "wealth effect"?
On the financial news channels, the complaints from Wall Street's bears were familiar: Greenspan is looking at the past, not the future, and without further slashing of interest rates, the business world will never be able to finance its way out of the current gloom. But wherever Greenspan is looking and whatever he's seeing, it seems clear that he's quite a bit less panicked than the Wall Street crowd about how bad the Main Street economy is, and is going to get.
The marketeers' view is that these days, Wall Street and Main Street are too closely entwined for the Fed to separate. The "wealth effect" now affects half of American homes; NASDAQ moves up and down with retail sales; when the markets fall, the wallets close and where's your recovery then?
The Fed knows all that, and to prove it, led off its statement with a well-hedged word or two about it. "Persistent pressures on profit margins are restraining investment spending, and through declines in equity wealth, consumption."
Leave 'em wanting more
But once you start obeying the markets' demands or even appearing to obey them things get awfully tricky. Certainly, with inflation well contained, a 75-point cut wouldn't have hurt, but if Wall Street takes 75 and goes right back to selling next week, Greenspan's been used and thrown away. So until he gets clear evidence that the economy or people's perception of it is getting worse, Greenspan seems willing to stick to the safe side of monetary policy, toss in a little bias and let the markets figure the rest out by themselves.
This Fed, along with the rest of us, may still be trying to figure out how to incorporate the financial markets into the economic big picture, but we may be seeing a pattern in how Greenspan plans to deal with the Street surprise no one, and always leave 'em wanting more.
For the second meeting in a row, most investors went in expecting a 50-point cut and wanting more, and for the second time, Greenspan gave them 50 and left the door ajar behind him.
By week's end, Wall Street will have penciled in that extra 25 points for some time in April by which point they'll be asking again.
They're likely to be disappointed.