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Those wily ol' Fed folks
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October 15, 1998: 6:57 p.m. ET
In age of non-stop rumor-mongering, Greenspan still has the power to stun
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NEW YORK (CNNfn) - Admit it. Beyond the mere adrenaline thrill of another market-revving interest rate cut, there was something exquisitely pleasurable in watching all those Wall Street pundits struggling Thursday to shrug off another bout of Alan Greenspan whiplash.
With impeccably unpredictable timing, the Federal Reserve chairman unleashed his latest salvo -- a quarter point reduction in two key lending rates -- just as President Clinton was strutting into the Rose Garden to unveil an eleventh-hour budget agreement and two Mideast leaders were waiting on the verge of a summit meeting nearby.
While the surprise action -- taken during a teleconference of Federal Reserve policymakers mid-way between two official committee meetings -- was unusual, Fed-watchers say it was far from an aberration.
The last time the Fed tweaked rates between formal sessions of its Open Market Committee was in the spring of 1994. But a decade earlier, during the inflationary spiral of the early 1980s, between-meeting interventions were commonplace, as the central bank sought to keep a recalcitrant economy afloat.
This time around, market strategists say, it wasn't the economy, stupid, that prompted the unexpected action -- but the edgy marketplace.
And if the Fed acts with Star Chamber secrecy at time, boosters argue, it's all in the worthy cause of market maintenance.
"They could have waited, but they're trying to give us a signal that they're more than just vigilant -- that they're actively seeking to ease monetary policy," said Roger Kubarych, the chief investment officer at Kaufman and Kubarych Advisors.
An Annum Horribilis for world markets
Kubarych said he believed the Fed chose to act earlier, rather than later, due to "special circumstances" in the market. He cited "gargantuan" losses in two major hedge funds, D.E. Shaw and Long Term Capital Management, a palpable tightening of credit, and a yawning gap in lending spreads.
"It's the Annum Horribilis of Asia, Russia and hedge funds," he quipped, adding that he believed "Greenspan is ahead of the game in recognizing the severity of the potential shock of the system."
Still, even hardened market veterans were taken off guard by Greenspan's timing and rationale for the early intervention. After all, they point out, as recently as the past couple of weeks, the Fed chief publicly opined in remarks before the National Association for Business Economics that while the U.S. economy had weakened "measurably," it was still alive and well and he saw no signs of a credit crunch.
On Thursday, however, Greenspan cited "growing caution by lenders and unsettled conditions in financial markets" as the driving force behind a quarter-point rate reduction in both the discount and federal funds rates, from 5 percent to 4.75 percent, and 5.25 percent to 5 percent, respectively.
After the fact, of course, market experts tended to extol the virtues of the early move.
"There's no doubt that this rate cut and interest rate decline provides liquidity," said William Sullivan, a fixed income strategist at Morgan Stanley Dean Witter. ""But … it suggests market conditions may have deteriorated even further since late September.
"To have this quick of a reaction in terms of rate cuts," Sullivan added, "suggests that the Fed was seeing crunch-like conditions."
John Ryding, an economist at Bear Stearns, said the groundwork for Thursday's cut was probably laid at the FOMC's last formal meeting on Sept. 29, when the committee lowered its key rate from 5.50 to 5.25 percent.
"I believe that at the last meeting there was a split among those who perhaps wanted a half-point cut and those who wanted a quarter-point," Ryding said. Given the division, Ryding speculated, the policy board likely agreed to go with the lesser reduction, while scheduling a conference call for Thursday to vote on the possibility of further action.
The fact that eight of 12 regional reserve banks supported Thursday's action, Ryding added, suggested firm grass-roots backing for the move -- something Greenspan would be hard-pressed to ignore.
"The Fed is now picking up the pace of lowering rates," he said. "It needed to and it's absolutely the right thing to do."
None of these explanations, however, dispel the sense for some equity managers that following the Fed is akin to the job of former Kremlinologists, who kept close tabs on the line-up of Soviet leaders atop Lenin's mausoleum on holidays to discern who was in favor and who was not.
"What the Fed is doing by making this stand now is saying, 'We will be the guardian of the U.S. economy,' " said Liam Dalton, the president of Axiom Capital Management.
And given the linkage between global markets in the 1990s, Dalton added, this is Greenspan's way of trumpeting that the U.S. central bank is also, in some senses, Fed to the world.
--By staff writer Douglas Herbert
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Federal Reserve Board
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