Fed: Cautiously Optimistic!

Great news! The WSJ reports:

Federal Reserve officials are cautiously optimistic that the series of steps they have taken to stabilize markets have started to work.

Ugh! “Cautiously optimistic” is one of the great all-purpose bullshit media phrases of all-time. It means nothing. It sounds thoughtful and sober, but it really communicates nothing. You can see why central bankers love using it.
Neil Westergaard nailed the phrase a few years ago:

What a great all-purpose, meaningless qualifier to keep from looking stupid. It’s much better than just saying “I don’t know.” It implies that that the person really does know something important, but is being conservative and careful in the distribution of information, holding back the unverifiable facts for the good of the republic.
Or covering their behinds.
“Cautiously optimistic.” If the economy goes into the dumper again, we can say our earlier caution was warranted. If things pick up, we were right to be optimistic and “knew it all along.”

The Journal continues:

Officials acknowledge conditions are far from calm, and markets could easily take a turn for the worse. But they cite stable stock prices, a pickup in issuance of jumbo mortgages and other factors as evidence that in recent days conditions have improved, though gradually, instead of worsened.
Many on Wall Street are more pessimistic, and believe the Fed will still have to cut interest rates sharply, perhaps starting in the next week or two. But as long as Fed officials think things are getting better, they are less likely to feel pressured to cut interest rates immediately and more likely to wait until their scheduled meeting Sept. 18 to decide.

Going by the futures market, I’d say the Federal Reserve will cut in September and again in October. I don’t think the Fed wants to break out of its pattern of only cutting rates at meetings. It could, but I don’t think it sees the current situation as being that drastic.
One of my long-standing criticisms of mainstream market analysis is the centrality placed on the Federal Reserve. This is classic over-agency bias. Sure, the Fed is important, but it’s not that important. The Fed really can’t fight what the market wants. If the market demands a rate cut, well…sooner or later, it will get one.
Another issue that I’ve noticed is that some observers are treating the market’s recent activity as some major come-uppance for speculators. The market’s decline is not very steep and the most severe pain is confined to a small number of stocks. Yet, people will use any decline as an excuse for public moralizing.
Let’s keep in mind that equity valuations are still quite modest. Also, growth stocks have outperformed value stocks since the market broke. That’s hardly a come-uppance to irrational exuberance. Viewed from the long-term, this summer is barely a hiccup.
I still think the risk/reward tradeoff greatly favors equity investors. You could even say that I’m cautiously optimistic.

Posted by on August 22nd, 2007 at 10:20 am


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