The Fed envelope please -- the answer is: NOTHING!

The Fed discussed things and disbanded its meeting as it issued a statement eerily akin to the one from last month, that is apart from an acknowledgment that the world was going to hell in a hand basket. Well, at least we have a basket.

Still the Fed did manage to do some things:

• The Fed did stop naming high oil prices as a factor repressing growth. It replaced that factor with an expectation of slower exports to damp growth.
  
• The Fed did not change the Fed funds rate at this meeting.
  
• And Mr Fisher came back into the majority as there were no dissents this month.
  
• The Fed now places equal weight on down side risk to growth and the upside risk to inflation calling them both 'significant concerns'. Hard to argue with that in a month that the Fed holds the Fed funds rate steady.

Market see, market do

The markets that were 'priced' for a rate cut although most economists said 'the Fed wouldn't do it' sold off strongly on the bitter disappointment of no sugar coating for the financial crisis. But then the stock market came back which can only lead you to wonder if a rate cut would have produced a bad result for stock prices as we had warned (as one possibility). Bond yields fell. Oil remained lower by about $4 1/2 on the day. It was a tough day for the markets but in the end markets weathered the storm and lauded a very sensible Fed decision. While the Fed funds futures contract, a contract controlled by TRADERS who bet MONEY was WRONG and ECONOMISTS who only have OPINIONS were RIGHT, "the markets" where people also BET REAL MONEY, applauded the Fed's decision in the end. What does all this mean? It means Bernanke has come of age...

You can't call me Al...
This REMINDS us that ALAN GREENSPAN is not the Chairman anymore. All of this day's events remind us of that. Mr Greenspan had a very simple notion of financial crisis: cut rates and keep cutting them. He rarely disappointed the markets and had no trick other than a rate cut up sleeve. If the headwinds of the 'credit crunch' were 70 mph, he'd cut rates by even more. If the markets were priced for a rate cut, by golly they got one. Bernanke, by contrast, is more of a surgeon than a lobotomy-meister.

The Bernanke Fed's approach
As this credit crunch has evolved the Fed has invented new mechanisms to try and fight fire with water, floods with sand bags, and hurricanes with timely evacuations. No I am not talking about real natural disasters but a targeted approach to problem-solving. The Fed does not see the game as binary: to cut or not to cut as did Greenspan. It sees this as a more complex dynamic with changing conditions like the game of rock, paper, scissors. The strategy that wins this time, could lose next time. The Fed continually is trying to take the measure of the market and give it what will help if it deems that as appropriate. And Bernanke is not afraid to do what he thinks is right even if the markets aren't looking for it. That of course, will eventually change what markets look for since they try to anticipate the Fed. Some of us also feel that the markets sometimes try to bully the Fed. Greenspan seems to have been much more susceptible to that sort of manipulation than is Bernanke.

Markets actually acted sort of, well, almost healthy...
Interestingly markets were able to close higher without AIG's problem solved. Troubled WaMu and and acquisitive B of A's shares rose while Goldman's and Morgan Stanley's shares were batted about. Economists believe that at some point prices get low enough that buyers emerge. But in this financial crisis that has not seemed to happen -- until today. Maybe Hank Greenberg's letter and posture to 'retake' AIG was a catalyst. Hank once was shunted aside and pursued as a villain by now-disgraced Elliot Spitzer. Greenberg now is emerging as a White Knight at the company where he was once was alleged to have worn the black hat.

It just doesn't get any better than this.