By Evelina M. Tainer, Chief Economist, Econoday
12/22/00

Simply Economics will not be published next week in observance of the holidays. We will return with a new report on January 5, 2001. The ECONODAY staff wishes you a happy holiday season!

Federal Reserve Chairman Alan Greenspan indicated that he might be inclined towards easier monetary policy when he addressed a group of community bankers at the beginning of the month. This favorable development sparked brief activity in equity and bond markets. By the time the FOMC rolled around a couple of weeks later, market players were becoming convinced the Fed would change its policy stance from a tight bias (inflation risk) to a neutral bias. Just a day before the meeting, a Wall Street Journal story said Fed officials were inclined towards easier policy. This put financial market players on alert for an actual reduction in the federal funds rate from the current level of 6.5 percent, this despite the strong consensus among economists that the Fed would just go to a neutral stance. But market players hoped for a rate cut and in the anticipation bid up stock and bond prices on Monday and Tuesday morning.

The Fed disappointed market players by not reducing the federal funds rate target. But it did in fact go farther than the consensus forecast. They shifted from a tightening bias to an easing bias, bypassing entirely the neutral stance. Indeed, only 3 of 20 primary dealer economists in the bond market even posited such a move.

So, is Alan Greenspan the Grinch that stole Christmas by not cutting the federal funds target in December? Or, is Greenspan acting like a Santa by moving policy more aggressively than expected? According to the equity market reaction on the day and the day after the announcement, one would think that investors viewed Greenspan as Grinch.