Last week, the Federal Reserve appeared to indicate that it was rather concerned with where the economy was heading. It signaled this through its action to further loosen monetary policy by using cash from maturing assets to purchase longer-term Treasuries. The market was not particularly amused, as the Dow has been down a couple hundred points ever since. Why was the market so shaken?
The Bulls and the Uncertain
First, there are those who are optimistic about the market -- the bulls. Let's pair them with those who are uncertain. These groups of investors were likely disturbed that the Fed appears worried. But Minneapolis Fed President Narayana Kocherlakota think they overreacted. Here's what Kocherlakota said in a speech yesterday:
The F.O.M.C.'s decision has had a larger impact on financial markets than I would have anticipated. My own interpretation is that the F.O.M.C. action led investors to believe that the economic situation in the United States was worse than they, the investors, had imagined. In my view, this reaction is unwarranted. The F.O.M.C.'s decisions were largely predicated on publicly available data about real G.D.P., its various components, unemployment and inflation. I would say that there is no new information about the current state of the economy to be learned from the F.O.M.C.'s actions or its statement.
Indeed, the Fed reviews the same data as other economists and investors. So why should its opinion matter to the market? Well, because it's the Fed.