Although the overall state of the economy is favorable, some aspects of the current situation might be viewed as worrisome. In particular, beneath this placid surface are what appear to be a number of spending imbalances and unusual asset-price configurations.

Preparation for a potential problem seems to be the best course of action. Prudential supervision and good risk management in banking, and the pursuit of fiscal prudence and price stability during booms, may ultimately serve as the best insurance for dealing with the inevitable occasional asset-price breaks observed in our modern economy.

Normally, I would agree with Bill Poole about intermeeting moves. I don’t think it’s a good idea to count on them very often. But the interval between our March 20th and May 15th meetings is a long one and we know, as does everybody else, that we’re probably going to cut rates further. To delay that gives a rather perverse incentive to the market that makes it more attractive to sell stocks in order to buy bonds. While I accept your point that it would be desirable for the stock market to get its legs on its own and not through action by the Federal Reserve, there is another thing to consider. And that is that we have just had two days of really good stock market performance.

So if we were to cut the target funds rate today, we couldn’t be accused of doing so because of the stock market. Later in this 10-day window, that may not be the case. We may get to the point where we want to cut the rate in the next 10 days and the stock market environment will make the Greenspan “put” come alive again. So, I was disappointed to hear that you didn’t want to make a move today. I think we really should cut the funds rate today.

I indicated earlier that I would counsel against moving today, for if we do, in my judgment we will break whatever developing pattern for equity price stability may be currently emerging, at least temporarily. Were we to cut rates, there doubtless would be an initial sharp rise in stock prices as less sophisticated buyers enter the market.  However, a move today would remove the constructive ambiguity about monetary policy from the markets. As a consequence, after the initial price surge the more sophisticated traders could well be selling, with a distinct possibility that stock prices would fall markedly, essentially undercutting the nascent stabilization that may be in the process of forming. We would have used up some significant monetary policy ammunition without realizing any short-term stabilizing benefits. Long term, of course, it doesn’t matter much unless the failure of achieving short-term stability sets us on a path with long-term consequences.

To repeat, we have a credible intermeeting window over the next 10 days. Let us employ the time to monitor markets, but especially to look for evidence of emerging stability in capital goods orders. I might say in closing that I know all of you in the Reserve Banks will be working on Beige Book commentary shortly. And I would request that you make a special endeavor to see if you can gain some insights on what is going on in capital spending within your Districts and what the prospects are for a stabilization and hopefully an upturn.

Nonetheless, in the face of the energy price spike and the erosion of optimism in financial markets, consumer confidence, or sentiment, appears to be holding up reasonably well to date, though there have been some mixed signals of late...

...[I]n an economy that already has lost some momentum, one must remain alert to the possibility that greater caution and weakening asset values in financial markets could signal or precipitate an excessive softening in household and business spending.