Post-Fed confusion: An all-over-the-map day for markets

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The stock market gave up early gains to close with modest losses today, after the Federal Reserve’s latest interest rate cut. The Dow industrials eased 11.81 points to 12,820.13 after being up as much as 178 points shortly after the Fed’s announcement.

Wall Street often has wild swings on Fed days, so you have to be careful about reading too much into this turnabout. And April still managed to be the first winning month for stocks since October: The Dow rose 4.5% for the month; the Standard & Poor’s 500 was up 4.8%.

‘I think a lot of people were just taking profits today,’ said Jay Shartsis, director of options trading at RF Lafferty & Co. in New York.

There’s another train of thought on today’s action: Investors were disappointed that the Fed somehow wasn’t more explicit, in its post-meeting statement, in hinting that it was ready to pause in its rate-cutting campaign.

Why would the stock market want a pause? For one thing, that could encourage the belief that the economy, while very weak, isn’t collapsing. Second, a pause could bolster the anemic dollar, which in turn could put a ceiling on commodity prices, including oil. I explained this line of reasoning in this column last week.

Yet the popular perception today is that the Fed did signal a pause. But the dollar, which has been rallying against the euro for the last week, pulled back a bit.

Then again, so what if the dollar couldn’t advance? Oil still fell for the fourth time in six sessions, off $2.17 to $113.46 a barrel in New York.

Treasury bond yields also fell, suggesting that some investors in that market are thinking the Fed hasn’t hit bottom with its benchmark rate, now 2%. (Remember, Greenspan took us to 1% in 2003, so there’s precedent to go lower -- although everyone knows how much trouble that dirt-cheap money created.)

Mass confusion triggered by a Fed statement? It wouldn’t be the first time.

Circling back to stocks, the rally since mid-March has been rooted in the idea that things are bad in the economy but not horrendous. If the economic data in the next couple of weeks support that premise, then let’s see if the dollar can hold up, whether that lets more air out of the commodity bubble, and whether Wall Street can keep its wits.

Posted April 30, 2008