The Fed Giveth, and the Fed May Taketh Away

For anyone still clinging to the hope that the Federal Reserve is closer to the beginning rather than the end of this particular loosening cycle, take a close look at Fed governor Frederic S. Mishkin's speech today at the Risk USA 2007 conference in New York.

If it doesn't disabuse rate-cut optimists, nothing will.

Mishkin suggested the was on the fence about the Fed's most recent quarter-point rate cut. "Going into the meeting," he said, "I was comforted by the lack of direct evidence to date of serious spillovers of the housing weakness and of tighter credit conditions on the broader economy."

But, he added, he recognized that market sentiment was still, as he put it, "fragile." Mindful that another dose of "adverse news on the housing situation or on the macroeconomy more generally" could trigger a self-fulfilling prophesy of recession or worse, he chose to vote for a cut.

Before anyone thinks he's gone soft on inflation, he was quick to caution that "should the easing eventually appear to have been unnecessary, it could be removed."

If the thinly veiled suggestion that the next policy move could be a rate increase weren't enough to make clear that further easing is unlikely, Mishkin went a bit further.

Borrowing a thought from the statement the Fed released after the most recent meeting of its policy-making Federal Open Market Committee, Mishkin added that, in his mind, the two cuts so far had "reduced significantly the downside risks to growth so that those risks are now balanced by the upside risks to inflation."

He didn't explicitly rule out any more rate cuts, but made clear that they would only come if necessary to keep the economy growing. Saving the jobs of banking executives or the bets placed by subprime-mortgage investors is not a consideration.

"The Federal Reserve has a responsibility to take monetary policy actions to minimize the damage that financial instability can do to the economy," he said. "I hope I was clear in communicating to you that policies to achieve this goal are designed to help Main Street and not to bail out Wall Street.

E. Stanley O'Neal and Charles Prince realize that, only too well.

by Mark Stein