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FYI, from TheStreet.com
JW
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A Predictable Fed May Put the Market in Peril
By Jim Griffin
Special to TheStreet.com
2/2/00 3:20 PM ET
Predictable. That's what the Greenspan Fed has become, to judge by market
reaction to its action today and by the accuracy of market commentary prior
to that action. It remains to be seen if predictability is a good thing in a
central bank.
Bottom line: This Fed remains unconvinced that it needs to put aside its
characteristic gradualism and adopt a more activist policy of restraint. It
apparently perceives that aggressiveness on its part may cause a market
collapse that will validate, in retrospect, the creeping fear that U.S.
equities are a bubble at risk of popping. It continues to prefer to use a
wet blanket rather than an ice pick in dealing with the bubble, if indeed
that's what it is.
The risk is that wet-blanket gradualism won't prevent further inflation of
the bubble because the market has grown complacent in its judgment that this
Fed is predictable in its aversion to dramatic and unexpected policy
tactics.
With 25-basis-point hikes to both the fed funds and discount rates, the Fed
validated the consensus expectation, splitting the baby between those Old
Economy adherents who feel a more decisive tightening is necessary and the
New Economy enthusiasts who wonder why tightening is at issue at all.
Greenspan, like a presidential candidate, seems to be aiming to please most
of the people most of the time.
The FOMC's press-release language is skewed, or biased, in the direction of
concern about whether current policies will deflect "increases in demand
[that] will continue to exceed the growth in potential supply, even after
taking account of the pronounced rise in productivity growth." Further, "the
Committee believes the risks are weighted mainly toward conditions that may
generate heightened inflation pressures in the foreseeable future."
The key question going forward has to be whether a policy of gradualism will
work to "get ahead of the curve" and slowly deflate the imbalances that now
underlie the Fed's concerns about inflation risks. If not, our markets are
destined ultimately to be hit with several doses of monetary policy
desperation as a Fed that finds itself both behind the curve and predictable
has to play catch-up to reestablish its credibility and its fear factor in
the minds of market participants.
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Jim Griffin is the chief strategist at Hartford, Conn.-based Aeltus
Investment Management, which manages institutional investment accounts and
acts as adviser to the Aetna Mutual Funds. His commentary on the financial
markets is based upon information thought to be reliable and is not meant as
investment advice. While Griffin cannot provide investment advice or
recommendations, he invites you to comment on his column at
GriffinJ@xxxxxxxxxxx
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