Angell Surprise

If you can remember back as far as Monday, you will recall that it was a great day for the markets—both the Dow and Nasdaq indexes were up around 2 percent. Why? Apparently they “rallied on hope,” as the saying goes, that the Federal Reserve would cut rates ahead of the next policy meeting on March 20. Last Friday, Bear Stearns economist Wayne Angell reportedly believed that there was a 60 percent chance of such a move. But on Monday word went around that Fed Chairman Alan Greenspan was tinkering with his planned testimony before Congress. This tidbit, according to the Wall Street Journal, caused Angell to fiddle with his prediction, and he upped the odds of an early cut to 80 percent.

What is the point of Angell’s line of speculation, and why does anyone care? The point is the belief that news of a rate cut will boost stocks, and news of a surprise rate cut will boost them even more. It’s hard to believe that a timing difference of three weeks will have a material impact on the actual economy, but in this instance we’re not talking about the economy, we’re talking about stocks. If you can get “in front of” the news of a rate cut, especially a surprise one, you’ll ride stocks higher (this theory goes).

The reason someone might care what odds Angell puts on such an occurrence is that Angell is a former Fed governor. In fact, in the period immediately after he left the Fed in 1994, he was reportedly able to charge some stock analysts $100 a minute for his views on interest rates. The reason, of course, is that his “views” were shaped by rather fresh memories of the job he’d just left. Bear Stearns recruited him aggressively and “marketed” him as a man who has “been inside the temple,” as one observer put it back in 1995. (At one point early in 1994, some critics suggested that his prediction skill might owe to the improper use of insider information, but nothing ever came of it. Well, one report noted that Greenspan stopped playing tennis with him. That’s about it.)

Anyway, three trading sessions later there’s been no surprise from the Fed, the Dow has given back its Monday gains, and the Nasdaq is at a low for the year. I don’t know whether Angell has adjusted his early-cut probability prediction again, and it’s possible that he’ll be proved right and the Fed will make an early move. But so what? Perhaps there was a time when Angell had better insight on the Fed than anyone else, but such an advantage is rare and fleeting when you’re dealing with something that it is as hyperscrutinized as the Fed’s movements are today. Maybe this is why Angell finds himself in the curious position of saying that a “surprise” is 80 percent likely. If something is 80 percent likely, then can it really be described as surprise? Wouldn’t the surprise be if the thing that is 80 percent likely to happen did not happen after all? That’s how it seems to me. At the moment anyway. I figure that I’m about 80 percent sure.