Why Greenspan Spun Into Action

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Chairman of the Federal Reserve Alan Greenspan

Nice move.

Alan Greenspan couldn't have been pandering to Wall Street, because Wall Street was already finding its smile. After shrugging off Cisco's woes on Tuesday (and feeling pretty good about having done so), the Dow and the NASDAQ were already surging Wednesday on Street-beating earnings reports from Old and New Economy stocks alike — Intel, General Motors, J. P. Morgan Chase, and AOL Time Warner (parent empire of this writer — go stock options!). The rally, you see, was already on.

Which must mean that when Alan Greenspan phoned in a 50-basis-point cut in the federal funds rate, he was worried about the economy and only the economy. Advancing unemployment. Declining retail sales, housing starts, and consumer confidence. An economy that wasn't in recession yet, as far as anybody knew, but that was bouncing around near zero growth and definitely in danger of getting dragged below sea level by increasingly pessimistic consumers.

The economy, not the markets. Right? The markets had quieted down about the Fed and just about given up on the possibility that Greenspan would give them anything at all before the May 15 meet. A cut then was still considered a given, 25 or 50 points off the top, but with a month to go nobody was really waiting around. Yet what seemed to be a self-inflicted rally had taken root over the holiday week, and this week it was holding up. Maybe Greenspan was just waiting for Wall Street to stop begging.

Or for consumers to start. Wednesday morning came with more numbers — the index of leading economic indicators slid again, more steeply in March than in February, and the trade deficit was suddenly lower than it's been since the end of '99, thanks to record monthly decline in imports. Consumers were starting to retrench, no more pretending they weren't, and if they stayed away the economy had nowhere to go but down.

The markets made the timing exquisite. Central bankers and Treasury men hate making their moves against the inertial wind — it wastes juice to try turning the markets around — and whether or not Greenspan was actually market-timing (he'd prefer that you think not), he certainly got the most bang for his buck. With an earnings-based rally already on, the index charts all grew a near-vertical line at 10:50 a.m. when the news hit. Three hours later, the party was still going — the Dow was up over 400 points and the NASDAQ nearly 200, and traders were suddenly remembering the good old days, when tech stocks doubled right in front of your eyes.

That, of course, is not necessarily a good thing. In the middle of a slump like this, getting too excited about corporate prospects is asking for a slap in the face when the other kind of earnings news comes along — some of Wednesday's euphoria will inevitably be sold off, and probably sooner rather than later. But Greenspan's first concern was never the "reverse wealth effect" Wall Street had only just stopped screaming about (rallies will do that). For the Fed it was the Main Street stuff — jobs, malls, cars and houses — that was going to turn this slowdown from a correction to a disaster.

It probably doesn't matter anymore. Whether consumers were watching their portfolios or reading layoff headlines or hearing rumors at work or just plain worried about that r-word everyone kept warning them about, they weren't spending. And when consumers account for two thirds of U.S. economic activity, you don't need to find out why they're depressed — you just do what you can to cheer them up.

Greenspan has now lopped two full points off the federal funds rate, a point of that between meetings. Short-term interest rates now start at 4.5 percent, and everything from mortgages to car loans to corporate bonds should now be a little cheaper. Wednesday, he even managed to catch the markets by surprise, like he did back in January, and that gives this latest rate cut a head start on its slow seep into the wider economy. May 15 is still nearly a month away, and the full FOMC, with another month's numbers spread out on the mahogany conference table, may well move again.

Wednesday's surprise makes it harder to argue that Greenspan and the Fed haven't done all they could to start the U.S. economic pulse beating again. The Street, for the time being, is all smiles, and the shocked financial commentariat (present company excepted) will have to finish their humble pie before starting to squawk anew.

Unless, of course, this 50-point cut is like the year's other three, and doesn't pry those wallets back open.