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Fed Defies Wall Street, And Wall Street Cheers

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So the Federal Reserve decided to defy market expectations and the predictions of most Wall Street economists that it would cut 100 basis points from the Fed Funds target rate and delivered only a 75 basis point cut. Economists for Citigroup, Morgan Stanley, Goldman Sachs, Standard & Poors and Bear Stearns all called it wrong.
DealBreaker’s readers did better. The chances of a 75 basis point cut ran neck and neck with the chances of a 100 basis point cut for most the morning and early afternoon. As the Fed announcement approached, however, the votes for a 75 basis point cut pulled ahead. Thirty-nine percent of readers voting in the poll favored 75 basis points, and 34.% favored 100 basis points. Joseph LaVorgna, chief U.S. economist at Deutsche Bank, also called it right by predicting a 75 basis point cut.
The market then also defied almost everyone’s staging a tremendous rally after the news broke. Goldman Sachs had warned that “anything less than the almost [one percentage point] that is now discounted will risk an adverse market response that could aggravate the fragility Fed officials are trying to repair.” Well, at least in terms of the immediate market reaction, that prediction seems dead-wrong.
Why the rally? We don’t like to offer explanations for movements of broad stock market indexes. But we do think the Fed statement probably reassured many investors by re-iterating the Fed’s awareness that the economy is in peril and repeating its new mantra about being prepared to take further action should things deteriorate. What’s more, there was something comforting in the display of a Federal Reserve confident enough to defy the clamoring of the Punch Bowl Caucus. From a Fed that has lately seemed to only ask “how high” whenever Wall Street has said “jump,” those 25 points of defiance are a welcome sign of independent judgment.