All About The Statement
It’s Fed Day and as you may know, I don’t care for Fed Days or any other day where the majority of investors seem to be singularly focused on what this group does or says.
Here are some past posts on this topic - note that today’s commentary (below) is a bit different, but these cover some stuff I wanted to say again.
I am told today is one of those special days where the market is certain what the FOMC will do with rates and that all the smarties have already “priced it in” - apparently to perfection. UGHHH! I am not a fan of this idea that the market does such a great job looking forward or discounting everything and as for the reliability of the Fed Funds Futures trading - it is pathetic. But on this special Fed Day where just about everyone is now pitching the concept that there is no chance of a rate change in either direction - we are told it is All About The Statement. Supposedly since the rate is locked, we should all be inspired or moved by the “carefully worded statement” and divine some explicit or hidden meanings from the supposedly brilliant economists. PLEASE! PLEASE! PLEASE! Would you look at past statements from the last few years? Just click here to go to the Fed’s website.
Today, you will be barraged with a word by word analysis of what was included or excluded, whether it was too dovish or too hawkish, whether the risk to growth is equal to, greater than or less than the risk of inflation, and what all this means for signaling the next or future series of rate decisions. When you hear or read all of that crap, please think about the Fed’s past statements. Forget about how they made you feel or how they made the market feel or whether they “anchored your expectations” about rates, growth or inflation. Forget about all that sentiment bullshit. The reason for this post is to ask you to objectively evaluate what they said a year ago. Was it correct regardless of how it made you feel?
For example - how about this comment from the December 12, 2006 FOMC statement when they held Fed Funds at 5.25%?
However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.
Did inflation moderate over time? Did energy prices lead to a reduced effect on inflation? And yet, at the time, I am sure many market participants (Fed Watchers) may have been impressed by the FOMC’s brilliance. Maybe even it helped to anchor those inflation expectations everyone is suddenly so concerned about.
And since I don’t want to just pick one example, how about this from the very next FOMC statement in January 2007 when they held Fed Funds at 5.25%?
Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters.
Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time.
I am not quite sure about those “tentative signs of stabilization” in the housing market that the FOMC saw in January 2007 - are you? Again with the moderating inflation. And as for the moderate expansion in the economy over coming quarters……I missed that one. Were you comforted by this statement back then?
Please take the time to read through the past few years of FOMC statements. It will not take long but it will be worth it. You cannot just compare this statement to the words in the last statement and believe you know anything about whether the Fed knows anything. I suggest the best way to do that is to look back in time and see whether they knew anything when they made those statements.
Remember….it’s “All About The Statement” and if this is truly so important, don’t the wrong assumptions in the past statements mean anything?
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