And investors signaled their displeasure by knocking stock prices down sharply after the Federal Open Market Committee, the Fed's policymaking arm, failed to take decisive action against a slowing economy at its Dec. 19 meeting. Indeed, if the only question troubling the monetary watchdogs was the state of the economy and inflation, the central bank might well have acted differently. After all, the economic news is grim. Corporate capital-spending plans are shrinking fast, and pink slips are up sharply. Banks and other lenders are stingy with credit, and the stories emerging from corporate headquarters strongly suggest that management is hunkering down for tough times.
Consumer confidence is down, and retail sales are surprisingly weak for the holiday season.
Looking at the economy in isolation, the evidence is compelling that the Fed should have taken out an insurance policy against a severe downturn next year by cutting rates now. The central bank seems haunted by the brokerage-house refrain that Greenspan won't let the stock market decline too far or too fast. From the Fed's perspective, the danger in easing now is giving credence to the Wall Street mantra that the stock market has become so central to the New Economy's performance that the Fed will limit any major losses. Of course, the Fed doesn't want a falling stock market to severely undermine the real economy. Since central banking is much art as science, the Fed has decided that the risk of moral hazard is greater than the threat of a recession.