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The article posted below strikes me as just so much pap. The Fed has no
option other than predictable, gradualism. The Fed is driving on an icy
road and if it jams on the breaks, it is going to lose control and drive the
economy into the ditch. Driving on an icy road isn't comfortable, but, it
beats being in the ditch.
In my view, the fact that the market is up following the most recent rate
hike simply reflects the reaction to fears of a 50 basis point hike that
were shown to be overblown by a 25 basis point hike. Over the longer term,
the fact remains that as the cost of money increases, the economy and
earnings growth will slow, and stock prices will decline or, at a minimum,
rise more slowly.
Dan
>From: "JW" <JW@xxxxxxxxxxxx>
>Reply-To: JW@xxxxxxxxxxxx
>To: <realtraders@xxxxxxxxxxxxxxx>
>Subject: [RT] A Predictable Fed May Put the Market in Peril
>Date: Thu, 3 Feb 2000 01:38:38 -0800
>
>FYI, from TheStreet.com
>
>JW
>---------------------
>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.
>
>----------------------------------------------------------------------------
>----
>
>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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