Where is the Leadership?

Where is the leadership in the Federal Reserve System? I wonder…the market wonders…and so does the world. Ben Bernanke has been the Chairman of the Board of Governors of the Federal Reserve System since his swearing in on February 1, 2006 and, as yet, we have failed to see any leadership established at this very important institution.

Yesterday, the Federal Reserve cut the target Federal Funds rate by 25 basis points, reducing this target to 2.00%. The statement put out by the System states a little of this and a little of that…and, by the way, don’t expect any more cuts in the near future.

Huh! Is anybody there?

The 25 basis point cut was seemingly done because the market expected it! So we get a scenario of a guy taking a young woman home from a date. She lets him kiss her on the doorstep, but immediately says…you got what you wanted but don’t expect anything more. I mean it…realllllllllllllllly. And, then she smiles.

The last time I can remember leadership like this was when the chairman of the Board of Governors was the only person in the history of the United States who was chairman of the Board of Governors and then became the Secretary of the Treasury. Do you remember who that was?

The head of the central bank needs to provide strong leadership…he (or she) needs to be someone markets can have confidence it. Although he may speak elliptically, market participants must feel that someone is in charge! At present, we are waiting for this person to show up.

By-the-way, the chairman of the Board of Governors I referred to two paragraphs ago was William Miller.

Goldilocks at the Fed

The financial markets gave the Federal Reserve System three choices. The Fed could cut their target rate for the Federal Funds rate by one-half of a percentage point to 2.50% from 3.00%; or it could cut the target rate by three-quarters of a percentage point to 2.25%; or it could it could cut the target rate by one full percentage point to 2.00%.

The Federal Reserve tasted the full percentage point cut and felt that this choice was way too hot and so did not make that choice. Next the Fed tasted the choice of a one-half point cut and said that it was way too cool and so did not make that choice. Finally it tasted the choice of a three-quarter point cut and believed that it was just the right cut to make…and so yesterday it made the three-quarter of a percentage point cut.

The financial markets seemed very happy with this choice. The stock market staged a strong rally.

A question exists…who is in charge here? I believe that the financial markets are not convinced that they have the answer to this question yet.