Did The Fed Cater to Wall Street

Do I think anyone on the Federal Open Market Committee said "Look these losses in the stock market are unacceptable we need to move" - no I don't.

Was there concern that widespread panic was ensuing that would result in a capital market freezing up - likely. Moreover, it was a sign that market participants were significantly increasing the likelihood of a major financial institution failing, this concerns the Fed deeply.

Look, I was shocked at the move and I am not certain that it was the right thing. Only hindsight can tell. However, we had started to get conclusive data that the US was slipping into recession. Because credit quality is already slipping a US recession is likely to be self-reinforcing.

That is, high unemployment leads to more foreclosures which leads to less lending which leads to higher unemployment.

So there was definitely a need to act. Last week I was even open to 75bps at the Jan 30 meeting. My biggest concern was spooking the market. But, the market was already spooked, so no loss there. So I believe the cut was designed to stem the recession. The collapse in equity markets was a sign that the recession was worsening and could itself contribute to the recession if it resulted in less spending or lending.

However, that being said the members of the FOMC are human. It was hard to watch the entire world selling off and not do something. I mean you could see that markets tumble literally as the world turned. As soon as daylight hit a region, it was in the red.


As for the ECB's tough talk. Number one, they do not have a dual mandate. Technically, they are responsible only for managing inflation not unemployment. However, I also think they are somewhat in denial. We have seen this before. We saw Japanese central bankers in the early 90s in denial about how bad it could get.

What we are looking at are severe downside risks and now it the best time to stop them. If a Japan type scenario is on deck for the US, this would be the time to prevent it. So while the move shocked me, I understand it.

I am sure Bernanke does not want to leave his post wondering if he stood by while the same forces that engulfed Japan, take down the US. If that means that he has to risk his rep now, I am guessing he says, so be it.