In case you didn't see this from Briefing.com:
Fed Watching
23-Aug-99 00:05 ET
Rewind to June 30. In a long anticipated move, the Fed finally raises the funds rate by a
quarter point and shifts the policy directive from a tightening bias to neutral. The Dow
rallies 155, the Nasdaq rallies 44, and the 30-year bond yields falls 10 basis points. Fast
forward back to August 24. In a long anticipated move, the Fed is preparing to tigthen by
another quarter point and will probably leave the policy directive at neutral. Great buying
opportunity, right? Wrong.
The week ahead is fraught with risk despite the friendly comparisons that can be made to
the last FOMC meeting on June 30. Much of the risk this time traces back to that June 30
reaction. Because the June 30 tightening was followed by a strong rally, many investors
are looking for a repeat. Unfortunately, recent market action already reflects that optimism.
Prior to a two-day rally at the last FOMC meeting, the Dow had dropped 200 points in the
week prior. Last week, the Dow rose 127 points. The June 30 rally was due partly to the
fact that the market was caught short ahead of the meeting. That will not be the case this
time.
Also arguing against a repeat of the June 30 rally is the changing perception of the Fed's
policy directive. Prior to the June 30 meeting, the FOMC had a tightening bias; they
surprised the market by shifting to a neutral directive after raising rates on the 30th. That
shift was another important factor behind the market rally.
Even in a best case scenario on Tuesday, we will not see a repeat. The FOMC still holds
the neutral directive, so the best case is that policy makers leave the directive neutral after
hiking rates. That is the probable outcome, but it will expose the silliness of the directive
and will certainly offer no encouragement to the stock market. If the Fed can tighten after
switching to a neutral directive and then retain that neutral directive after tightening,
investors will justifiably feel that the directive tells us little about the future of rates. And
indeed it does not.
That's the best case scenario. The worst case scenario is that the Fed not only tightens,
but shifts back to a tightening bias and includes threatening language about the possibility
of another rate hike. That's not the likely outcome in our view, but it is a significant risk.
If all that were not enough for the stock market -- and it probably is enough -- there is the
prospect that vacationing Fed officials could give the market even more fits later in the
week. Many FOMC members, including Greenspan, will be headed out to Jackson Hole,
Wyoming for a conference sponsored by the Kansas City Fed that gets underway on
Thursday afternoon and continues through Saturday.
The KC Fed conference is usually a quiet affair so far as the equity market is concerned,
but the subject of this year's conference is worth noting. Briefing.com has learned that this
year's theme is "New Challenges For Monetary Policy." That may not sound threatening,
but how about these sessions: "What's the Appropriate Role For Monetary Policy In The
Presence Of Asset Bubbles And Financial Crises" and "Practical Experience With Financial
Bubbles."
When all of the world's leading monetary and fiscal policy makers start talking about asset
price bubbles and their implications for monetary policy, it cannot be good for stocks,
particularly US stocks since that's where everyone believes that the bubble threat is
greatest.
With few earnings or economic reports of note this week, it looks certain that the Fed will
be the focus. And it doesn't look as if the Fed will be friendly. |
