The Wealth Effect: Acceptable Or Not?
In an action that has not occurred during the 14-year
stewardship of Chairman Alan Greenspan, the Federal Reserve cut short-term
interest rates 50 basis points in a surprise move that came between regularly
scheduled meetings. Stock index futures surged, stacking on gains from an
already bullish session that got going after Intel
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In the Fed’s statement about the surprise cut, it is
interesting to note how closely it is watching the stock market and the wealth
effect on the economy. Previously, the Fed has maintained that it does not
target equity prices to achieve its monetary policy objectives. Here’s a portion
of today’s statement demonstrating its close watch of the shares market and the
wealth effect’s impact on the economy:
“The effects of early reductions in equity wealth
on consumption . . . threatens to keep the pace of economic activity unacceptably
weak.”
Nasdaq 100 futures
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S&P futures
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Dow futures
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have escalated a whopping 475.
June dollar index futures
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115.84 show that traders are satisfied with the economic effect that the rate
cut is likely to have and that its focus is shifting from perceptions about
relative economic growth back to the more traditional relative interest rate
differentials.