Analyzing today's rate cut

So was today's rate cut simply an early salve to calm jittery markets or does The Fed have something else in mind? From today's Wall Street Journal (plus video!):

The three-quarters of a percentage point cut in the Fed's short-term interest rate target -- to 3.5% -- could help restore confidence to investors and counter the threat of recession. But the reduction risks making the Fed look like it panicked in response to market developments...

The move would be "pointless" if it merely shifted a scheduled rate cut ahead by a week, said former Fed governor Laurence Meyer, now vice-chairman of consultants Macroeconomic Advisers LLC. "Instead, today's move was driven by a desire to get a larger cumulative change in the federal funds rate by the end of the month." He predicted a half-point cut next week.

Vincent Reinhart, a former top staffer at the Fed now a scholar at the American Enterprise Institute think tank in Washington, said the Fed may have put itself in "harm's way" by basing its action so explicitly on market developments. "If markets go down after you've acted, do you jeopardize some of your credibility? I think they did."...

So what did some of the candidates for President have to say (prepare for speechmaking):

On the presidential campaign trail, candidates Hillary Clinton, a Democrat, and John McCain, Republican, were quick to react to the Fed's surprise three-quarter percentage-point rate cut this morning -- but offered quite different messages.

"This is a global economic crisis," Sen. Clinton said at a news conference early this morning. "It has pushed the Fed into an emergency meeting and a rate cut in an effort to take whatever action can be taken on the monetary side to begin to try to stabilize this situation which is obviously deteriorating."

The New York senator went on to say that President Bush already should have convened a "working group on financial markets….This has to be regulated across markets with regulators here and regulators around the world." She also urged top lawmakers and the White House to reach agreement at their meeting today on a stimulus package that can clear Congress quickly.

Sen. McCain, on the other hand, didn't apply the pressure, though he did put in a plug for his stimulus plan, consisting mostly of tax cuts, and a plug for the Fed. "The role of the Federal Reserve is to ensure that our financial markets are well-functioning and to support economic growth," the Arizona senator explained in a statement. "I am confident that the action taken this morning to cut two key rates will support these goals. The U.S. economy has proven to be quite resilient. I am concerned about financial market events, but with the right leadership and pro-growth policies the economy can weather this upheaval."

In Boca Raton, Fla., Mitt Romney, former governor of Massachusetts and former head of Bain Capital, acknowledged concerns about the stock market, and mentioning his investment in a blind trust at Sun Capital, which was started by one of the event's attendees. "I hope I still have it at Sun Capital and I hope that as of tonight Sun Capital still has it too, so we're all a little nervous about that," he joked.

Getting serious -- and optimistic -- Romney said: "I can tell you from my own personal experience that every time I've seen things really get scary and the markets really collapse that I put aside that fear for a moment and say, 'Ah-ha, is this a buying opportunity?' Because my experience has always been what goes down, comes back up."

He then returned to the presidential pitch, saying that restoring the economy's health "is going to require, I believe, action on the part of leadership in Washington to do those things which will convince the world that America is going to come back strong and our economic foundation is secure."

Sounds good, Mitt! Hope you believe that tomorrow, too!

Finally, the economists react (which can find at the WSJ blog Real Time Economics):

There can be little doubt the Fed would have waited until the meeting next week if it had not been for the state of the markets. … After this action we do not expect a further move next week — though it can’t be ruled out — but we do think they will ease by another [half point] at the March 21 meeting. The economic data will continue to worsen; this move is not an instant fix. The economy is still staring recession in the face, but at least the Fed now gets it. –Ian Shepherdson, High Frequency Economics

This is very constructive and I think it shows this country and the rest of the world that our central bank is nimble and can move quickly in response to market conditions. –Henry Paulson, Treasury Secretary

Don’t take today’s move as a sign that the FOMC is done. Given that the next scheduled FOMC meeting is not until late March and assuming the FOMC does not want to make a habit of inter-meeting actions we expect, as do the futures markets, the FOMC to cut the funds rate by another [half point] at their end of the month meeting with another cut in the discount rate likely as well. In short, the FOMC has taken their date to dinner, but till has to spring for the movie as well before they can expect any kind of payoff. –Richard F. Moody, Mission Residential

The Fed will cut rates again at next week’s meeting by either [a quarter of half percentage point]. The Fed has been unwilling to disappoint the market and fed funds futures are leaning very strongly toward a half-point cut next week. However, we disagree with the Fed over the longer-term outlook for inflation — to us, events have a strong stagflationary feel about them. –Bear Stearns

The recent turbulence in financial markets was the clear trigger for today’s action. In the wake of this move, a wide array of policy options now appear to be on the table for next week’s meeting. We suspect that the most likely outcome is another [quarter percentage point] rate cut — but, it is also possible that they will leave rates unchanged or cut more aggressively. … During the 1994 and 2001 policy cycles, intermeeting moves were always followed by further action at the next meeting … However, we do not believe that these comparisons are particularly relevant to the current environment. In all of these instances, there was a much longer lead time before the next meeting and all the other intermeeting moves were only a quarter or half percentage point. –David Greenlaw, Morgan Stanley

Let’s face it, cutting today rather than in eight days at the regularly scheduled FOMC meeting is meaningless in terms of the fundamental economic outlook. While a deteriorating economy obviously argued for easing at the upcoming meeting … there can be no doubt that the timing of this morning’s move is aimed at supporting global financial markets after yesterday’s global equity meltdown. The policy statement clearly indicates that the FOMC is prepared to ease further. Whether the next move occurs in eight days is difficult to say at the moment and could well depend on how markets react between now and then. –Joshua Shapiro, MFR, Inc.

We cannot rule out further aggressive action is possible as early as the next meeting. As of now, it will depend on how financial markets take this news. We see a [quarter] point rate cut as likely at the scheduled meeting next week, followed by another [three-quarters of percentage] point of easing through June (25 each in March, April and June). –Drew Matus, Lehman Brothers

The FOMC eased policy aggressively because of the weakening economy and the recent plunges in both domestic and international stock markets. The Committee is also likely to reduce rates again next week at their regularly scheduled meeting.–Steven A. Wood, Insight Economics

Compiled by Phil Izzo