"Praying for Chemotherapy"

That’s Barry Ritholtz’s take on the market’s reaction to the Federal Reserve’s Open Market’s Committee release this week, which staged a nice peppy rally because the report was seen as signalling a greater likelihood of an interest rate cut.

Some more discerning observers read the report much less positively, and saw it pointing to stagflation.

Ritholtz is far from a constitutional bear (I’d label him a cynical bull), so his skeptical reading is worth noting. From Barrons’ Trader column, and also reported on Ritholtz’s site, The Big Picture:

The progression of illness a typical arc: Symptoms surface. A diagnosis is rendered. Then comes a prescribed remedy and, possibly, recovery.

But for investors who had been fretting about the contagious spread of mortgage delinquencies, a benign economic prognosis from the Federal Reserve last week was all it took to feel sprightlier — and drive up stocks prices. In holding interest rates steady at 5.25%, the Fed also dispensed with a customary threat to tighten monetary policy as needed. The famous phrase’s conspicuous absence was interpreted, rightly or wrongly, as a willingness to begin cutting interest rates soon.

That mere whiff of a possible prescription was enough to send this patient into recovery. Stocks raced to their biggest one-day gain this year once the Fed statement hit the tape. The broad rally lifted all sectors, with financial stocks leading the way…..

Whether the market’s suddenly improved sense of well-being is warranted remains to be seen. Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics, likens investors’ clamor for a possible rate cut to “praying for chemotherapy.”

“The Fed begins cutting rates for two possible reasons — when it’s apparent that inflation is no longer a problem, which isn’t the case here, or when economic growth slows dangerously,” he says. Steady inflation gauges and firm commodity prices — crude oil is at a three-month high, and copper prices are up 12% this month — suggest inflation remains a threat. So was Dr. Bernanke more concerned about the economy than he lets on?

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