Headed to the office: Federal Reserve chairman Alan Greenspan
When is that senile old codger going to give us back our bull market?
OK, that's not a direct quote. But Alan Greenspan, pope of the New Economy, heads into Tuesday's meeting not only with a larger-than-usual portion of his prestige on the line, but with a statement to make about whom the Fed is supposed to be rescuing — Wall Street or Main Street.
Keep in mind that a cut of at least 50 basis points (half a percent, in layman's terms), bringing the federal-funds rate down to an even 5 percent, is a sure thing. The markets have priced it in already — many Streeters like to use the term "only" (as in, "only 50 points?") when discussing a cut that size — and there remains a good possibility that such a move would be met with a sharp sell-off. A bigger cut of 75 points or even more, say the bears, is the only thing that can save the markets now: They need to see a sign that Greenspan isn't only a believer in the bust, he's rolling up his sleeves and doing something about it.
He used to get a lot more credit for being ahead of the curve. All this fall and winter, as the downturn has hit and hit hard, Greenspan has been taking a relative pasting in the financial commentariat for that now-infamous 50-point rate hike last May. Greenspan thought he was staving off inflation in the wake of 7 percent Q1 growth; it turned out he was looking at the wrong end of the business cycle, and now the marketeers figure they can tell him what to do.
Certainly Greenspan is listening; all that talk about the "wealth effect" and, especially, consumer sentiment is an acknowledgment of how much Wall Street has come to be a prophet (self-fulfilling or not) for the fate of the larger economy. The "breach in confidence" that Greenspan has been fretting about in front of Congress was born in the NASDAQ bubble's bursting, and the case Wall Street is loudly making now is that Greenspan had better stop its bleeding, or the economy will still be comatose next spring.
But Greenspan's charter bogeymen are inflation and the economy, not the bulls and bears — and the economy's pulse isn't all that shabby. With last week's University of Michigan consumer-confidence numbers hinting at a trough, and unemployment still happily contained at 4.2 percent, where's this recession we've heard so much about?
The Fed has room to cut by 75 or even 100 points if it wants — inflation is even better contained than unemployment — but there are several reasons why it probably won't. First, a more-than-expected move (and we're talking 100 points here) runs the risk of indicating that the Fed knows something bad, something very bad, about the economic picture that the rest of us don't. Not good for consumer confidence. Second, a 75-point cut would be just what the markets want, which is maybe not what the Fed wants to get in the habit of delivering.
Greenspan pays attention to the markets, sure, but he's always been extremely wary of overindulging them — and he may be even more so these days, when their criticism of him has reached something of a fever pitch. Wall Street isn't just hoping for interest rate relief, it's demanding it, and in Greenspan's eyes, the tone may be bordering on the hubristic. He's delivered a full point of cuts so far this year, and telegraphed another half-point for Tuesday, and still the markets want more? The economy may not be screaming turnaround yet, but it also shows no signs of getting worse — at some point, Greenspan has to leave Wall Street to deal with its own fears.
One thing about those Michigan confidence numbers: For months, pessimism has been confined to respondents' long-term outlook, while the current outlook has remained sunny. Last week's numbers hinted at a reversal in the trend: Things look bad now, but they're going to get better. The poll was taken before last week's Wall Street slide, but one could take encouragement from the fact that consumers are starting to agree with what has been at the heart of Greenspan's utterances lately: There's no fundamental reason why this downturn should turn into a way of life.
Another danger for Greenspan in handing the markets a 75-point cut is that it'll be like giving candy to a child: It'll put them in a good mood for a few hours, but it won't keep them from pouting again next week if the mood strikes them. And without compelling evidence that consumers — at two-thirds of U.S. economic activity, the buffer in any U.S. slowdown — are passing from pouting to depression instead of in the other direction, there's little reason to load up on rate cuts when their full effect will hit Main Street next fall, just when the economy could be picking up steam again. Remember, that's what happened last year.
History suggests that any consistent easing by the Fed produces double-digit market gains within 12 months, and another half-point cut certainly meets that criterion. History also suggests that Greenspan gets it right a lot more often than he gets it wrong. Combine a track record like that with an ego like Greenspan's, and it's not hard to envision him using Tuesday's meeting — coming in a sea of inconclusive data about where Main Street and the slowdown go from here — to send a conclusive message to Wall Street:
If they need good news so badly, let them find out that this pope still makes his own calls.