False Justification for Fed Rate Cut: August Jobs Revised, Government Causes Market Turmoil

It must be difficult for the government to predict the future when it cannot even report the past accurately.

The Bureau of Labor Statistics (BLS) revised the August jobs figures from a 4,000 loss to an 89,000 gain.

The "loss" (and its implication of a slowing economy and reduced inflation pressure) was part of the justification for the Federal Reserve's September 50 basis points (bps) slash to the benchmark Fed funds interest rate.

Now we have a statistics revision as I warned.

Government Causes Market Turmoil

The government has the markets bouncing like a yo-yo. The jobs revision caused the Chicago Board of Trade's Fed futures market to plummet the chance of an October 25bps rate cut from 72% to 48% since yesterday.

Meanwhile, some analysts assert that Wall Street already has "priced-in" an expected October rate cut from Fed Chairman "Helicopter Ben" Bernanke, which means that a Halloween hold (no cut) might kill the stock rally and put the stock market right back where it was in its August decline.

Will the Fed admit its blunder of injecting adrenaline into an already warm economy?

If the Fed can keep its stories straight for a moment, it might remember that the alleged jobs loss was a reason that allegedly allowed the drastic rate cut without an inflation fear. Since apparently there was no jobs loss after all, the deflationary estimate was wrong, and the Fed did not have room to cut rates without inflation, so the Fed did create unecessary inflation pressure.

August '07 was only the squall before the 2008 hurricane.

Meanwhile, the unemployment rate edged up to 4.7% despite the absolute job gains, and the housing crash continues unabated with more adjustable-rate resets due in early 2008.

Do you think that Bernanke will counteract his mistaken 50bps cut to 4.75% with a 100bps rise to 5.75% (50bps over the August rate of 5.25% to counter the mistaken 50bps reduction from the August rate)?

Alternatively, will he dream up a new reason to cut rates again at the October 30/31 Federal Open Market Committee (FOMC) meeting?