Deciphering The Fed's Changing Views

August 7: "Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy."

(Still thinks economic expansion will continue, and hence keeping inflationary pressures at bay would be a big priority. Strong belief in the resilience of firm US jobs market and a strong global economy helping things along)

August 17: "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

(More concerns on subprime mess due to leverage effect and the fact that no one knows how many hedge funds were affected. No panic yet but genuine care taken to try and ensure the mortgage business and credit lending does not seize up. Hints that the Fed might take extravagant steps to stave off recessionary repercusiions)

September 18: "Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time."

The statements last night were an eye-opener, much like seeing Pakistan beat Australia in the 20-20 cricket tournament in South Africa las night. There is an open admission that the subprime and housing correction may get worse before things improve. The key word in the above para is "forestall" or rather "to help forestall". This shows acceptance of a dire situation. This implies accepting that pockets of the US economy will be affected, and more importantly, clearly shows that the Fed is very committed to cut rates even more aggressively in the months ahead, if necessary. That is probably the key message from the Fed last night.

As usual, everyone should gear up for a robust last quarter. The markets should get their groove back.