The excellent Kevin Drum finds himself bewildered by the large gulf between his reaction to financial news and that of Wall Street:
I will never understand Wall Street. Here’s the latest:
Fed Official’s Remarks Send Stocks Soaring
Stocks soared on Wall Street today after a top Federal Reserve official appeared to open the door for additional interest rate cuts….In his speech this morning, delivered to the Council on Foreign Relations in New York, [Fed vice chairman Donald] Kohn pledged that the Fed “will act as needed” to address the volatility of the current economic situation.
“Uncertainties about the economic outlook are unusually high right now,” he said. “In my view, these uncertainties require flexible and pragmatic policy making.”
Now see, if it were me I’d be running for the hills at this news. Sure, Kohn was signalling that the Fed might cut interest rates, but he was only doing that because he thinks there’s a danger that the economy might be tanking. So here’s the difference:
Kevin: Economy tanking = bad. An interest rate cut is nice, but it doesn’t nearly make up for a bad economy. I’m going to go hide in a cave.
Wall Street: Interest rate cut = good. Who cares if the economy is souring? Let’s party!
Yes, sure, lower interest rates make stocks a relatively better investment than bonds, and that’s good news for Wall Street. But the effect is small, and the stimulative effect of an interest rate reduction is both small and far in the future. A declining economy, by contrast, is bad news right now, and the vice chairman of the Fed just warned us that he was afraid the economy might indeed be declining.
And the market goes up 300 points. I don’t get it.
