May 22, 2001 -- IT`S now a week since the last Federal Reserve cut interest rates, and this would be a great time for someone to tell you the truth.
When the Dow Jones industrial average rose an astonishing 343 points - or 3.15 percent - Wednesday, it was alternately described in the papers as a delayed reaction to Tuesday`s half-point cut in interest rates or as a cheer for the slightly less-than-expected jump in consumer inflation announced the morning of the rally.
Now for the truth: It was neither of those. Those explanations, in fact, are ridiculous.
What really happened? The market was reacting to a little-understood, barely discernible move by the Fed Wednesday morning to kick stocks in the butt.
Last Tuesday the Fed decided the economy was doing so badly that interest rates needed to come down another half-point. What probably shocked the Fed was what happened after Tuesday`s rate cut - nothing. Alan Greenspan and his cohorts must have been really annoyed.
Then came the magic that everyone missed. Mid-morning on Wednesday the Fed did $11 billion of what are called repos.
Here`s what happens: The Fed goes to banks and takes $11 billion in government bonds off their hands and gives them cash in return. None of this is actual money. You couldn`t see the Brinks trucks pull up. It`s just a ledger entry.
But the move gives banks a lot more money to lend and to invest.
The $11 billion figure last Wednesday was much larger than the market had been expecting and, within minutes, the stock and bond markets were moving higher.
Does this mean Wall Street thinks the economic trouble is over? Not at all.
What the smart people on Wall Street took from the experience is that the Fed is willing to do anything to get the stock market higher. The Fed may or may not have magical abilities. But with straight-forward rate cuts no longer having their intended effect, Washington seems willing to experiment.
This subtle repo action by the Fed was obviously missed by those who like simple reasons for their rallies.
The Fed`s decision to spike the market higher on Wednesday with an infusion of liquidity into the banking system is a controversial one. Purists would say that Greenspan and his gang ought to leave their dirty hands off the free-trading U.S. markets.
This is going to get me a lot of irate e-mail, but I say the Fed needs to do anything in its power to make sure the stock market doesn`t go any lower.
And that includes intervention through the purchase of futures contracts, and tricks like the repo-maneuver.
Even with the big drop of the last year, stock prices are still very overvalued. And the U.S. economy is doing so poorly right now that we simply can`t take a chance of allowing equity prices to decline any more.
Alan Greenspan did what he had to do on Wednesday, which also happened to be one of those options-expiration weeks where the market has a tendency to go higher, anyway.
There`s one more thing you need to know. What the Fed is doing is in direct contradiction of the way free markets are supposed to work, probably contrary to the charter of the Fed - and definitely very dangerous.
You probably only care about the dangerous part, so here it is.
Stocks are still very high priced. And the impact of Fed rate cuts is negligible.
If Greenspan`s attempts to re-create the bubble fail - or even become too transparent - the integrity of our entire monetary system could come into question.
You might want to keep your fingers crossed that this works.
* Please send e-mail to:
jcrudele@nypost.com
nypostonline.com/business/30953.htm
When the Dow Jones industrial average rose an astonishing 343 points - or 3.15 percent - Wednesday, it was alternately described in the papers as a delayed reaction to Tuesday`s half-point cut in interest rates or as a cheer for the slightly less-than-expected jump in consumer inflation announced the morning of the rally.
Now for the truth: It was neither of those. Those explanations, in fact, are ridiculous.
What really happened? The market was reacting to a little-understood, barely discernible move by the Fed Wednesday morning to kick stocks in the butt.
Last Tuesday the Fed decided the economy was doing so badly that interest rates needed to come down another half-point. What probably shocked the Fed was what happened after Tuesday`s rate cut - nothing. Alan Greenspan and his cohorts must have been really annoyed.
Then came the magic that everyone missed. Mid-morning on Wednesday the Fed did $11 billion of what are called repos.
Here`s what happens: The Fed goes to banks and takes $11 billion in government bonds off their hands and gives them cash in return. None of this is actual money. You couldn`t see the Brinks trucks pull up. It`s just a ledger entry.
But the move gives banks a lot more money to lend and to invest.
The $11 billion figure last Wednesday was much larger than the market had been expecting and, within minutes, the stock and bond markets were moving higher.
Does this mean Wall Street thinks the economic trouble is over? Not at all.
What the smart people on Wall Street took from the experience is that the Fed is willing to do anything to get the stock market higher. The Fed may or may not have magical abilities. But with straight-forward rate cuts no longer having their intended effect, Washington seems willing to experiment.
This subtle repo action by the Fed was obviously missed by those who like simple reasons for their rallies.
The Fed`s decision to spike the market higher on Wednesday with an infusion of liquidity into the banking system is a controversial one. Purists would say that Greenspan and his gang ought to leave their dirty hands off the free-trading U.S. markets.
This is going to get me a lot of irate e-mail, but I say the Fed needs to do anything in its power to make sure the stock market doesn`t go any lower.
And that includes intervention through the purchase of futures contracts, and tricks like the repo-maneuver.
Even with the big drop of the last year, stock prices are still very overvalued. And the U.S. economy is doing so poorly right now that we simply can`t take a chance of allowing equity prices to decline any more.
Alan Greenspan did what he had to do on Wednesday, which also happened to be one of those options-expiration weeks where the market has a tendency to go higher, anyway.
There`s one more thing you need to know. What the Fed is doing is in direct contradiction of the way free markets are supposed to work, probably contrary to the charter of the Fed - and definitely very dangerous.
You probably only care about the dangerous part, so here it is.
Stocks are still very high priced. And the impact of Fed rate cuts is negligible.
If Greenspan`s attempts to re-create the bubble fail - or even become too transparent - the integrity of our entire monetary system could come into question.
You might want to keep your fingers crossed that this works.
* Please send e-mail to:
jcrudele@nypost.com
nypostonline.com/business/30953.htm
