Gleacher's Russ Certo Telling Us the Fed is Green-lighting Equities, Not So Much the Economy

That's the bottom line on the FOMC's interest rate decision announced on Tuesday. The Committee voted to keep rates at sustained low levels at least until 2013, citing darkening economic conditions as a primary consideration. We spoke with Gleacher managing director and head of rates Russell Certo on Benzinga Radio to get his thoughts on the policy announcement and how it reflects on the U.S. economy. His read: "The deduction would be that the Fed sees something that is meaningful and serious enough for them to implement a policy which is not typical in the central bank community." The word might already be out on the economy though at this point, and the Fed may be a bit late to the party on this one. True, we've all (meaning us and the Fed) been watching the same economic indicators, but Russ points out that "people can just as easily go online and go to the Baton Rouge Chronicle or the Sacramento Bee and develop and assess their own conditions, anecdotal conditions." Thus, as Russ puts it, "market players already had a vision of where we were headed anecdotally." So, rates will remain low for another two years, "at least." Between word of this, ruckus related to the S&P downgrade, freak-outs in Europe, and bad economic numbers in the United States, the markets have seen a busy past few weeks. Russ sees money flowing out of bonds and into equities:

"The irony is that the effect today with the equity tail wagging the fixed income dog is that the bond market, which was originally the first mover in this process, is now responding to a benign equity environment. "What the chairman effectively has done is not only set a low interest rate scenario, but he essentially held up a smoking gun and is strongly encouraging through communications confidence to the marketplace to invest."

Russ also had some interesting thoughts on hiking rates:

"I think actually if the Fed raised rates, it would be perceived differently than probably what the mainstream press would deduce. I think right now there's plenty of savers out there in the United States and the world that are essentially being penalized by interest rates. "The demographics of this country are getting older, and people live off fixed incomes. I'm not so sure you wouldn't get a consumption boom if the Federal Reserve actually raised short-term interest rates. People who buy CDs, consumers, investors, and anyone that was able to gain fixed income cash flows and liquidity in their passbook savings accounts and other short-term instruments may feel a little bit better about their cash flow and go out and spend money. "Also, that confidence factor--if the Fed communicated a rate change to markets, I think there's a whole lot of investors that would possibly actually suggest, 'Well, maybe the Fed is seeing something in the economy so that they're more confident.' There could be a feedback loop that's not obvious which would be encouraging to consumers. "Mind you, technically speaking, a move in front-end rates would actually preserve the protection you have as an investor in the fixed income markets from an inflation point of view. Long rates could actually rally on a token rate hike."

Of course, the prolonged dollar weakness being perpetuated by the Fed is proving unsatisfactory for everyone else as it drives up the value of foreign currencies, making it exceedingly difficult for many countries to compete in exports. The Swiss National Bank is doing everything it can to keep the USD/CHF from the likes of 6.5% swings on an intraday basis as money flows out of risk assets in search of safe havens. Russ on growing foreign exchange tension, which sounds like it has some potential for fireworks, especially given the confidence inspired in all of us by the people in charge:

"Regarding currency wars: it's a race to zero. That's what gold is telling you. "Whether it's Japan, or Brazil, or Korea, or Switzerland, or Geithner, it appears that monetary policy regimes are struggling to keep exports going and business going around the world and are trying to make adjustments to imbalances in the economy, there's no doubt. I don't think that's going to stop any time soon. "Capital is out there identifying inefficiencies, whether it's inefficiencies in government policy, inefficiencies in central banking, inefficient allocation of resources from companies' poor decisions, and that capital seems far more mobile than sometimes the academic constructs and slow-moving, antiquated constructs of policy and government. "So you're literally seeing kind of like a new war. It's a financial war where a certain type of efficient capital is responding to what it perceives as inefficient capital. So far, it's free to move wherever it wants in the world, but as you can see, there are even regimes that are trying to restrict the free flow of capital right now. "That's what these no-short rules are about, that's what these central bank interventions are about, foreign exchange interventions, the setting up of FX swap lines, all of the liquidity provisioning from central banks, certain currency controls, price controls, and so on."

Since markets worldwide post-2008 financial crisis have been pretty tied by Fed policy, though, bottom line is you need to hear what they are saying. Russ tells us what they're saying: "The Fed basically has told you for two years they're keeping rates low. That is a very deliberate statement. I think that was to communicate effect, and I think markets should take their cue from that. The Fed does in reality have the ability and flexibility to change their policies based on a variety of metrics over time if they so choose." find us on Twitter @matthewboesler, @lukelavanway, @BenzingaRadio, @Benzinga