Watching the post-Fed announcement finance shows (both before and after the market close), along with a read of the print media on the Fed's move, brings up a number of observations regarding the recent decision. The most interesting observation is how the market participants and pundits really, and I mean really, wanted a halt in interest rates, now or in the future, along with at least a neutral bias. Of course, the market did not get what it wanted. Or did it?
As the statement was released, every word was parsed to find its hidden meaning, or at least to see what was different from the last statement (more about this is a moment). What may be even more interesting is how all the hand wringing may have just been wasted energy, as the contents of the Fed report almost seemed to not matter. The majority of the pundits immediately talked about how the Fed has signaled a pause, some before they even read a word themselves. Even headlines from the major print media and other publications are using this and similar language - the Fed is pausing.
Below is the exact statement as released by the Fed:
- The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.
Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting.
In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta, and San Francisco.
If you are having trouble figuring out what is different from the last meeting, have no fear - you are not alone. To make things easier, the WSJ has done all the heavy lifting for you, creating a parsing graphic - essentially taking the parsing of the statement to comical proportions. Even worse is how the pundits read into the statement what they want. My hope is that unlike the rest of us (myself included), the Fed spends more time worrying about the implications of their moves, and less about how the statement will be interpreted. Given the general nature of the statement, I suspect that this is not the case.
So let me join in the fun, and confusion.
- Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
Interpretation: Therefore, we plan to pause. Well, maybe not. In fact, you could argue for just the opposite.
- Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.
Interpretation: Inflation is a mixed bag. Core is better, and the committee expects inflation to moderate in coming quarters. Nonetheless, energy and other commodity prices have increased, and there is still uncertainty. So what is the read? Since inflation is not as much of a problem (core), and commodity prices are moving just as they were during recent cutting, we can keep on lowering rates. Therefore, do we plan to pause? Well, again, maybe not. Like before, we could argue that they will stay the course, continuing to cut.
- The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Interpretation: The key for the pundits is the first line. Easing to date is working, has helped to moderate growth, and should continue to do so. Gone from the previous statement is the phrase "downside risk to growth remains." Different to be sure, but is "help to promote moderate growth over time" a big enough change to infer a pause? Some mention that the second line also supports the pause, but isn't this line simply the Fed's mandate? Others supporting the impact of the second line mention how "act as needed" has now replaced "act in a timely manner." Seems a stretch to me. So now, while not timely, the Fed will monitor developments and act as needed, either to increase growth or decrease inflation. Again, isn't this just their mandate?
In the end, the market is hanging on the "substantial easing" paragraph, assuming that a pause is in the cards. This may very well be the case, but I am not sure this is what the Fed is signaling, or intended to signal. Furthermore, I am not even sure this is what the market is now signaling. A Fed pause would imply a stronger dollar, lower commodity prices, lower prices for the related agriculture plays (like the fertilizer companies), and a general market rally. We really got little of this after the announcement on Wednesday. Maybe future market action will give more clarity.
[Update: Clarity - indeed. Nice rally Thursday. Since a number of resistance levels are being tested, the next few days/weeks will be interesting. The strong dollar, and its effects, played out today.]
Of course, maybe we are missing the point entirely. Debating the impact of the statement on the markets may be like debating a lagging indicator - it is what it is. Maybe it makes more sense to talk about how the market action today, and over the next two months, will impact what the Fed does at their next meeting. It is certainly starting to look more and more like the markets move and control the Fed, and not necessarily the other way around. With unclear statements, the Fed may be simply hedging its bets. The current market action may be just a clue for what will drive the next decision. Of course, when that decision is made, and the statement is released to the market, we will once again need to roll out the parsing machine and let the silliness continue.
While seeming to follow, instead of lead, the Fed is contributing to the problem and giving the market the power. Like a spoiled child, the market did not get what it wants, and as a result, is not going to play nice. Trying to convince us that the Fed is done easing, regardless of whether that is actually the case or not, is not going to change the behavior. What the market needs is closure.
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