What Does the Fed Know That the Rest of Us Don’t?

WHAT DOES THE FED KNOW THAT THE REST OF US DON’T?….McClatchy suggests one reason why the Fed might have surprised everyone with a bigger rate cut than expected:

In a special report, Wachovia economists said Fed Chairman Ben Bernanke and five Fed governors met earlier this month with heads of the nation’s major home builders and may have gotten a peek at sales and cancellation data.

“We believe those data showed a significant deterioration in home sales, which may be evident in next week’s new and existing home sales reports,” the report said, predicting a drop in new and existing home sales of 10 percent or more for August….Such a sour outlook might explain why the Fed surpassed most expectations that it would cut its benchmark interest rate by only a quarter point.

This is a good excuse to ask a question that always crosses my mind when the Fed does something “unexpected” — in this case cutting interest rates by half a percent instead of a quarter percent.

Obviously, a big rate cut has some substantive effects on the economy (and on equity prices in particular), which is why the stock market rallied and everyone was so happy. But there’s a flip side, isn’t there? If the Fed cuts rates more than expected, doesn’t that also mean that the Fed is more worried than everyone thought it was? And isn’t it possible, as in the case of the housing figures mentioned in the Wachovia report, that this is because they know some bad news the rest of us don’t? Shouldn’t that worry us?