February 2008

If you remember, at that time, it appeared as though several Federal Reserve presidents were giving their own forecasts and opinions as to which Federal Reserve charge was more important: inflation or the economy. It was my belief that if the FOMC was going to fulfill its mission, they needed one voice to rise above the others. I thought that should be the Chairman. Let me repeat, that was in December of 2006.

Now fast forward to January 11, 2008 and a speech given by Chairman Bernanke in Washington. He was effectively rewriting the statement that followed the December 11, 2007 FOMC meeting in which the funds rate was lowered by twenty-five basis points, as in October. They repeated the statement that they felt the risk to the economy and inflation were “balanced.” In the speech on January 11, Bernanke pledged “substantive additional action” to insure against “downside risks” to the six-year economic expansion; so much for “balanced.” The unusual point of the speech was that the “committee” wasn’t referenced, as it usually is, and some folks on Wall Street believed it was the Chairman’s way of reassuring everyone that he was in charge. An economist with JPMorgan was quoted, “Bernanke chose to finally assume the mantle of leadership.” Yes, now that is what I was talking about.

It was generally believed that after the January 29 and 30 FOMC meeting the announcement would be of a fifty basis point reduction in the federal funds rate. Things change, and over the weekend of January 19 and 20, and the Martin Luther King, Jr. holiday on Monday January 21, the global stock markets tumbled. In response, at 8:20 AM on January 22 the Federal Reserve, after an emergency meeting, reduced the funds rate by seventy-five basis points. A reduction of that magnitude had not been seen since 1984. The Federal Reserve wanted the markets to know that they took the situation seriously.

The strange thing about this move was not only the magnitude, but also the timing. This special meeting and decision to reduce the rate came one week before the regularly scheduled FOMC meeting. Speaking of the timing, Wall Street was unhappy that they waited until 8:20 AM to make their announcement. Wall Street dealers set their rates much earlier and had to adjust rather quickly, forcing some earlier quoted rates to be changed.

At the FOMC meeting held January 29 and 30 there was an additional reduction of fifty basis points, bringing the total to 125 basis points in a little over one week. There had only been less than a four percent chance that the rate would be left unchanged. It definitely demonstrates how precarious the current economic situation is being perceived.

Whether we will enter into a recession or not is still being debated, but I believe we can take some consolation in knowing that we have a “new” Chairman who is assuming his role as the leader.