Fasten your your seatbelts, it's going to be a bumpy ride. Tuesday's announcement that the Federal Reserve was cutting a couple of key interest rates by a whole half of a point, not just the quarter-point that many economy-watchers expected, set off one heck of a party. What great news - for the short term.
But for some of us scaredy-cats, the news set off memories of the Carter Years and double-digit inflation. It also brought back the Dotcom Bubble in the Clinton Era - before that roller-coaster ride dipped precipitately at the end. How long will it be, some of us wonder, before references to the Greenspan Put is replaced by talk of the Bernanke Bubble?
But what, us Americans worry? Happy Days Are Here Again and pass the champagne. Who thinks about the hangover when glasses are being raised to the Fed? Immediately the stock market took off like a Roman candle. At closing, the Dow had jumped 336 points, or maybe over the Empire State Building. Whoopee!
The Dow gained 2.5 percent Tuesday to close at 13,739 - the biggest one-day jump in five years. Predictably enough, gold was up, way up, and so was the yield on long-term (30-year) bonds. The poor and getting ever poorer dollar was down - not good signs for those of us still concerned about inflation, not just de-. Shades of the disastrous Carter Years, crude-oil futures closed at a new high. Uh oh.
Sure, a great big fat interest-rate cut is a good thing, but as in too-much-of-a. How long before the Fed decides that what the economy needs is a whole point cut? Or several of them. Maybe it does, but why get there all at once?
"In the moments before the Fed's announcement, at 2:15 EDT, a calm came over the New York Stock Exchange as traders waited, gazing at information boards. When the news hit, noise filled the room as surprised traders scurried across the floor seeking to close bearish positions and bet on stock gains."
The spigot had been opened on the money supply and the bulls were lapping it up. Thank you, Federal Reserve. Maybe.
When those who control the reins of power hand out goodies, a savvy statesman named Machiavelli once advised, they would be well advised to do so in small increments - so the good news can keep coming. That way, people will have reason to be grateful again and again, not just once.
Confidence in the economy should be built the same way: slowly and steadily. So it'll last.
A quarter-point rate cut would have been a nice appetizer for an economy starved for cash. But a half-point drop makes it sound as if the Fed is getting ready to serve every dish on the menu in one course. Indigestion may result.
The same herd now rushing to buy will soon enough be running to sell when this stimulus abates and the inevitable downturn recurs, maybe bigger and worse. It's all enough to make one suspect that economics is but a branch of mass psychology. And the patient - in this case the fickle, buying-and-selling public - needs to be treated with care and consistency, not rushed from treatment to counter-treatment.