May Day and All That Jazz

May 1, 2008

Markets from China to Germany were closed today for May Day, a celebration of the worker with orgins that date back to pre-Christian Europe. Mayday’s other meaning is as a cry for help from extreme distress. Should the U.S. or even global economies be calling mayday, mayday, mayday? Not yet. In a jazzy lead editorial today entitled “The Big Easy,” the Wall Street Journal observes that U.S. real GDP excluding residential construction advanced by 1.8% saar and 3.6% in y/y terms. (Recall from the previous posting that means an increase of nearly 2% in real gross domestic product expressed at a seasonally adjusted annual rate, as well as growth of 3.6% between the first quarters of 2007 and 2008). Even with plunging home construction, GDP managed to growth 0.6% saar and 2.5% y/y.

“The Big Easy” refers to the Fed, not New Orleans, and explicitly to the Bernanke Fed’s MO that can be boiled down to “when in doubt, always cut interest rates.” The Journal disapproves of this week’s cut and the total of 325 bps of easing since September 18th, which it calls “an experiment in radical rate-cutting.” In the teeth of unacceptably high inflation and a weak dollar, Fed easing augments short-term downside growth risks by driving commodity prices higher, according to the Journal. While kinder to the Fed than the Journal, coverage of the latest rate cut in the New York Times and Financial Times also indicate that the policy stance is a gamble to some extent. Those papers both stressed the ambiguity of the latest Fed statement. Krishna Guha of the FT dubbed the new policy turn a “dovish pause,” and the NYT quotes from famed Professor Allan Meltzer, “My view is that the Fed is back doing the silly things it did in the 1970’s.” Amen. Like Bernanke, then Fed Chairman Burns had an academic background. He was an expert on business cycles but overtaxed monetary policy’s capacity as a tool for fine-turning the economy’s peaks and troughs.

Markets have not panned the Fed’s latest action and words. Twenty-four hours after the announcement, the dollar is 0.8% stronger against the euro and unchanged against the yen. Ten-year Treasury yields are 5 basis points lower on balance, and oil and gold have tumbled 3.4% and 1.7%, respectively. Despite a drop in late trading on Wednesday, the Dow Jones Industrial Average rallied today and is showing a net 24-hour gain of 0.5%. The Fed is receiving the benefit of the doubt for now.

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