Fed Vice Chairman Donald Kohn, in one speech, has changed Wall Street's view on the Fed. While most market players have expected the Fed to cut rates, the Fed itself seemed to be sending another message and that had some investors vexed.
The most recent Fed minutes show the Fed's last rate decision in October was a "close call." That spooked traders. The Fed has repeatedly, in statements and through officials' comments, stressed a view that the Fed does not necessarily have to act again.
But today's comments from Kohn are being taken as a sign the Fed is open to a rate cut and is aware of what is going on in the markets and the economy. There is also a sense that this view will prevail when the Fed meets to discuss interest rates Dec. 11.
Maybe the Fed was just misunderstood, or maybe it's new candor and openness just frankly creates confusion.
Take a look at these comments from Kohn today. "As the Federal Open Market Committee noted at its last meeting, uncertainties about the economic outlook are unusually high right now. In my view, these uncertainties require flexible and pragmatic policymaking--nimble is the adjective I used a few weeks ago."
"In the conduct of monetary policy, as Chairman Bernanke has emphasized, we will act as needed to foster both price stability and full employment," Kohn said this morning in a speech to the Council on Foreign Relations.
Markets like nimble. They didn't like a Fed that looked like it was pausing and more worried about inflation than economic uncertainties. "Out of touch" was one phrase I had been hearing, particularly from the cranky credit markets. Still, Wall Street had been ignoring Fed talk and was betting it would cut 1/4 point in December.
Kohn's comments are helping to fire the big rally in stocks today. Treasurys are moving lower as money flows into the stock market, and the dollar is a bit higher. Oil, meanwhile, is continuing its slide and is falling sharply below $92 per barrel.
Kohn also acknowledged the pain in those still dysfunctional credit markets that threaten the broader economy. "An important issue now is whether concerns about losses on mortgages and some other instruments are inducing much greater restraint and thus constricting the flow of credit to a broad range of borrowers by more than seemed in train a month or two ago," he said.
Kohn said a difference between now and the last FOMC meeting is that the markets are having troubles and the extent to which they are is surprising.
Kohn also gave a nod to what is becoming an increasing worry for investors. Rate cuts are welcome but they also have helped drive the dollar lower, to a point where it is becoming a concern. Not to mention the threats by certain OPEC members and others to lessen their dependence on the dollar. Kohn said that effectively pursuing the Fed's mandate will aid the dollar's value. Certainly, if it bolsters confidence in the U.S. economy that would be a plus.
Is Kohn just one voice on the committee or is he likely to have impact? I asked CNBC's senior economic correspondent Steve Liesman who follows all things Fed. "Kohn is the intellectual pulling guard of the Federal Reserve," says Liesman. Sounds like he has the clout.
Yesterday, you may recall Goldman Sachs economists said they saw a bigger chance of recession next year because of the sick housing market. But they also said they expected the Fed to change its posture and cut rates dramatically to help the economy. Perhaps this is a sign of that. By the way, 77% of some 400 plus Market Insider readers who took our informal survey agree with Goldman's view that a recession is more likely. Maybe some at the Fed do too.