Why Is the Market “Disappointed” With the Fed?

May 15 is the date of the next meeting of the Federal Open Market Committee, which sets Federal Reserve policy, most crucially the so-called Fed funds rate. These meetings, according to the Wall Street Journal today, now take on “the pre-event anticipation of a Super Bowl.”

In this case the pre-game show lasts for weeks, the Super Bowl lasts less than a minute, and then it’s on to instant Monday morning quarterbacking. Today the Fed cut the Fed funds rate by half a percentage point—historically speaking, a fairly sharp cut. Your thoughts, market pundits? “A wuss move,” declared Larry Kudlow on CNBC’s post-game wrap-up. I mean post-announcement coverage. And while the Dow and the Nasdaq had both been in positive territory before the announcement (rising even higher than Monday’s pop), both seemed to agree with Kudlow’s take and reversed course to close down decisively, neatly wiping out Monday’s little rally and in fact putting the big indexes at new lows.

How come? What gives? Don’t we all believe in the magical powers  of Alan Greenspan anymore? As is so often on the case in the markets, the answer is all in the expectations.

The market had a “positive bias” leading into today’s announcement—this means stocks were up, anticipating good news of some sort. This was, actually, the eighth straight time that the markets spiked before the Fed meeting. So, in this case, what would good news be? The answer is complicated by the fact that since the last FOMC announcement, there was an idiotic round of guessing games as to whether the Fed would “surprise” the markets with a rate cut between meetings. That didn’t happen. Perhaps because it didn’t happen, the hopeful new wisdom apparently pegged the amount of today’s widely anticipated cut at 75 basis points (three-quarters of a percentage point), lowering the Fed funds rate to 4.75 percent. (In this case conventional wisdom is measured by scrutinizing the trading of Fed funds futures contracts.)

That big cut didn’t happen either. And so, as has become the pattern recently, the “positive bias” before the meeting quickly melted into disillusionment—”disappointment,” is the human feeling generally attributed to the abstract markets at moments like this—and stocks sagged. This has become depressingly familiar. Further post-FOMC quarterbacking suggests that Greenspan is under pressure not to appear as though he is under pressure from the stock markets, and that may be why he dealt a smaller cut than the markets wanted. Who knows?

Even more depressingly, the market pundits immediately cranked up the next round of the guessing game, suggesting that the 50-basis-point cut “leaves the door open” for another “surprise” cut between now and May 15. Maybe that will happen and bring this latest Dow sub-10,000 era to a swift conclusion in a flourish of fairy dust. But I doubt it. It takes time for rate cuts to have an effect, time for earnings to recover, time to growth to pick up momentum again. If, some time between now and May 15, the post-FOMC quarterbacks would come to terms with this and stop hyping and second-guessing Greenspan’s every move, that would be a real between-meetings surprise.