What the Fed Left Unsaid

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Greenspan: Mixed messages

The Fed talked 50, but it cut 25.

The knee-jerk market reaction — down, down, down with a clamor — only presaged the peanut-gallery response to what may be seen as one of the least popular Fed moves in a long, long time. Because while the steep-sloped graph of Fed rate cuts this year now shows a distinct leveling off — right smack in the middle of the weakest economic quarter in a decade — nowhere in the 200-word accompanying statement was any hint of why Alan Greenspan chose June 27, 2001 to ease off on the throttle.

The Fed statement to its sixth rate cut this year (which means the funds rate has now dropped from 6.5 to 3.75 percent), hit all the same notes as the five 50-pointers that came before: "The patterns evident in recent months — declining profitability and business capital spending, weak expansion of consumption and slowing growth abroad — continue to weigh on the economy. The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future." And even, "The associated easing of pressures on labor and product markets are expected to keep inflation contained."

But what does that mean?

And that's the problem; the Fed's words were saying half-point cut, but the number was only a quarter. There was no acknowledgement — or even wishful thinking — about incipient signs of recovery. Nothing about fears of inflation down the road, a scenario in which the cuts of spring would be kicking in with an over-stimulatory vengeance this winter just as corporate America shakes off its blues. And certainly the pen of Greenspan rarely writes penetrably.

We're used to obliquity. But this, to quote the King of Siam, 'tis a puzzlement. And when you're trying to get business managers to make plans for a recovery (and to make those desperately needed capitol outlays just as soon as they can possibly stomach) you don't give them a mixed-signals migraine.

Is there something Greenspan isn't saying? In the economic atmosphere of this summer, some of the possible omissions are innocuous. Falling commodity prices, especially energy prices, are a virtual tax cut for the economy, and George W. Bush's starting-in-August rebate mailing is a tangible one for consumers. Maybe the Fed chair thinks those two will do the work of the other 25 points. Maybe that formula is what some inflation-fearing Fed governors made him follow, and Greenspan got the 50-point statement as a compromise. Or maybe, with Greenspan still smarting in the PR department from the one-too-many rate hike of last May, it was the other way around.

Or, it could be there's nothing left

Of course, maybe what he's not saying is that he's done all he can do. This doldrum could definitely be around a while. In the recessionary manufacturing sector, capacity utilization — actual production, as opposed to how much it could produce if anybody wanted it — is at the lowest point since the last recession. Banks are writing off bad loans hand over fist, and plenty gun-shy about lending to businesses with too few customers, no matter how cheap the money is.

All of which means the Fed's medicine — this cut, and the last five — is going to work more slowly than usual. And it hasn't worked so far, either — the Dow and the NASDAQ, after six months of cuts, are below what they were when Greenspan started this regime, owing mostly to a complete lack of a pulse in either corporate profits or capital spending. Big Al, staring at the chasm of time between and now and next spring, might have considered it pointless to throw an extra 25 points into the abyss — 25 points that might force him to start dousing the recovery, red-faced, as soon as it arrives.

He certainly wouldn't have been able to say that.

But he might have said something to justify what he did. Or done something — the full 50 basis points, like the steady drummer he's been so far — to justify what he said. This way, economists and pundits and investors and investor-watchers are left confused and maybe a little hurt — not to mention in possession of the excuse many of them have been waiting for to knock Father Greenback off his Teflon pedestal.

One good bet — he's not done, even if the graph would seem to suggest he's getting there. Look for mildly clarifying speeches by Fed governors in the next week or two, and maybe an inter-meeting cut well in advance of the August 21 meeting if any of the rosy economic news that hit the Fed's desk Tuesday starts to reverse itself. But for now, look for a lot of wrinkled brows and even more wrinkled noses.

Because while nature abhors a vacuum, what the financial world hates at a time like this is a puzzlement.