Like a bad parent of a spoiled child the Fed eased another 50 basis points. I want to be clear, we are not insinuating that the Fed is wrong to ease. The Fed has better access to data than I and the FOMC members are much brighter than I. However, I have two concerns.
1) The Fed's prior 175 basis points of easing have yet to work their way through the economy. Conventional wisdom states that it takes at least six months for Fed easing (or tightening) to work through the economy.
2) Like a spoiled child, the market may now believe that all it needs to do is "panic" and the Fed will ease.
Of the two concerns, it is the second that worries me the most. If the Fed eased too much, it can always tighten. However, weaning the markets off of the Fed's tit could be very difficult and make spark an almost violent response from the markets when the Fed eventually pauses.
The problem may not be that the Fed eased, but why it eased or at least the perception of why it eased. The Fed could have its work cut out for itself. It may be creating a moral hazard for nothing. Yes, GDP was a paltry 0.6%, but other data suggests that we may be at or near the bottom of the current economic crisis. Durable Goods was strong. Jobless Claims have been low. The ADP Employment report was very strong, pointing to a stronger Nonfarm Payrolls report on Friday. Core inflation perists.
This harkens back to the 1970s when the Fed would risk inflation in the attempt to not hamper growth. What it got was much inflation and not much growth. It took Paul Volcker's aggressive tightening to finally subdue inflation and sent us on a two decade journey to manageable inetrest rates (rate which were common before the disasterous "Great Society" era. Hopefully we are not seeing the pilot of "That 70s Fed".
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