[Briefing.com] Fed Follies 01-Feb-01 00:32 ET
[BRIEFING.COM - Gregory A. Jones] It's the funny season. Something about the Fed and Fed policy decisions brings out the ridiculous in everyone. Strange logic, irrelevant history, and an outright assault on the tea leaves are all hallmarks of this odd ceremony.
To get the full flavor the Fed follies, we'll take a look at it from a couple of different views and conclude with a brief dose of reality.
Fedwatcher View
There was a day when Fedwatching meant something. Today the Fed tells you what they're doing in a press release, but it wasn't always so easy. Back in the 1980s, not only was it difficult to know what the Fed would be doing in the future -- you didn't even know what they were doing in the present or recent past!
Policy changes were not announced; they were carried out covertly using open market operations. In those days, Fedwatchers were needed to decipher these covert operations. Now, in the age of the press release, Fedwatchers no longer have much of a role, so they content themselves with presenting Fed history minutiae.
We have all heard it by now: stuff like this: "if the Fed cuts the funds rate by 50 bp today and the discount rate by 50 bp, it will be the first time that they have cut the funds rate by 100 bp in two steps and the discount rate by 100 bp in three steps within one month since Nutcracker Man[http://www.britannica.com/seo/o/olduvai-gorge/] was wandering around the Olduvai Gorge." Fascinating stuff, and yet totally useless.
Stock View
The view from the stock market is only slightly less amusing. Bond guys do nothing but watch the Fed, even when the Fed is doing nothing. But stock guys only pay attention when the Fed is in action. As a result, their skills are not quite as polished.
Yesterday, some of these unpolished skills were on full display as stock jockeys strained to analyze the Fed's policy statement. The most amusing such analyses referred to the announcement as "guidance" as if the Fed had just released earnings and provided forward guidance. You can imagine the Fed policy statement parading as a corporate earnings report: "The FOMC is pleased to announce that it posted a record one-month cut of 100 bp in the funds rate during January. Looking forward, a weak macroeconomy and rising inventory levels have produced less visibility for the rest of Q1 and Q2. We see interest rates coming in at the lower end of analysts' range as a result."
Of course the announcement was not about guidance, it was about explaining yesterday's action. The statement about the balance of risks going forward can to some extent be seen as guidance, but not particularly useful guidance. After all, had you listened to it back in November, you would have expected more rate hikes by now.
Real View
After hearing the endless pablum emanating from the TV screens and newswires yesterday, you would think that the next Fed action was already decided, it was just a matter of reading the Fed's tea leaves correctly. But that's nonsense, if the next action was already decided, then it would have also been carried out. If the Fed thought that another quarter point would be needed next week, they would just go ahead and do it immediately.
The truth is that the Fed -- like the rest of us mere mortals -- is simply watching the data. If the NAPM and Employment Reports are much weaker than expected, the Fed will be more concerned and will probably move again in short order. If the data suddenly start improving, they'll hold off.
The bottom line is that it's a mistake to waste too much time on the wording of any particular announcement. As new data are unveiled, old announcements can quickly become obsolete. Watch the numbers, not the words.
For our part, we got nothing out of the announcement yesterday, but we do believe that the economic numbers will become significantly worse, and that quite a bit more Fed easing will be needed as a result.
Greg Jones
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