Jewish World Review Nov. 8, 2002 / 3 Kislev, 5763

David R. Kotok

David R. Kotok
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Fed may have taken themselves out of debate but they've added to uncertainty by surprising the markets | There's good news and bad news:

The good news: The Fed is doing all that it can.

The bad news: The Fed is doing all that it can.

Jokes aside, the decision of the Federal Open Market Committee (FOMC) approaches political brilliance. The Fed has taken itself out of the debate by cutting a 1/2 point and issuing a statement suggesting that "We are all through."

What's left to argue about among Fed watchers? Should the Discount rate be 1/2% instead of 3/4%. Should Fed Funds be 1% instead of 1 1/4%? C'mon. Fed watchers can now take a vacation or apply for extended unemployment benefits.

Fed officials can cut down on their speeches. Markets will ignore most of them.

Markets will be paying attention to other venues like the European Central Bank members who did not lower rates or the Japanese who are still floundering. Attention will focus on tax policy which is very important after this election, or, on fiscal policy which has been ignored, or, on the value of our currency which, we believe, will start to achieve higher status on the radar screen as the dollar weakens and the euro strengthens.

Our friends in the media will have to work harder. No more "Should the Fed cut?" pontification. Reporters are going to have to dissect complex issues like "Is the Alternative Minimum Tax hurting small business?" It is. Or, are the employment statistics distorted by the incarceration rate change during the last decade? They are. Or, are we properly measuring productivity? We're not. Or, can we now believe investment bankers and corporate spokesman? I will leave this one to readers since I am already in trouble with this commentary.

We applaud the politics of the FOMC 1/2 point cut. For an apolitical body they have been masterful.

Unlike some of our colleagues we do not applaud the psychology of the decision.

The Fed may have taken themselves out of the debate for now but they may have inadvertently added to uncertainty by surprising the markets. They may have added to the confusion about the U.S. economy. That is the negative result of the 1/2 point surprise.

By the way, I hope I am wrong.

JWR contributor David R. Kotok is President and Chief Investment Officer of Cumberland Advisors, Inc. His articles and financial market comments have appeared in The New York Times, The Wall Street Journal, Barron's, The Bond Buyer and numerous other publications. He can be seen on CNN, CNNfn and CNBC. Comment by clicking here.


11/07/02: The election and the Fed: Both validate stimulus
10/31/02: Welcome to the world of an enlarged and open Europe

© 2002, David R. Kotok