Sy Harding besplatni komentar: HE FED'S AMAZING POWER WITH WORDS! March 23, 2007.
As is usual, markets around the world waited in nervous anticipation for the outcome of the Federal Reserve’s FOMC meeting this week. As it has at each of its five previous meetings since last summer, it was a sure thing the Fed would also leave interest rates alone at this meeting. The nervousness was about the wording it might use in announcing that decision. Would it still be more worried about inflation than about the slowing economy, which would lessen the chances for interest rate cuts at future meetings? Or would it show more concern about the slowing economy, which would raise the odds for rate cuts?
Sure enough the decision was to leave interest rates alone. So with no change in interest rates to provide a clear signal of Fed policy, analysts around the world have been trying to glean what they can from the announcement that accompanied the decision. How many, and which words were changed from those used in its announcement after its last meeting in January? Did those changes of a few words indicate what the Fed is going to do with interest rates at its next meeting in May, or the one thereafter, in June?
The Fed’s announcement was not a complex 100-page scholarly treatise. The entire text of the announcement was this:
“The Federal Reserve Open Market Committee decided today to keep its target for the Federal Funds rate at 5.25%. Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters. Recent readings in core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures. In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”
Within two minutes of the announcement being released, the stock market, which had been dead flat all day, began to soar. In less than an hour the Dow was up almost 200 points. What had the Fed said that made the nation’s publicly traded companies worth hundreds of billions more in aggregate than they had been worth two minutes before the announcement?
Well, the Fed had removed the phrase “additional firming may be needed”, which had been in its January announcement. That is interpreted as meaning that at least it is not leaning as much toward possibly raising interest rates. It also gave a nod of recognition that the housing sector is still having problems. In its January announcement it said “some tentative signs of stabilization have appeared in the housing market.” This time it changed that phrase to say, “the adjustment in the housing sector is ongoing”. That was interpreted as increased recognition of the slowing economy. However, on that subject the Fed’s own wording stayed exactly the same as in its January announcement, when it said “the economy seems likely to expand at a moderate pace over coming quarters”.
25.03.2007. (21:21)
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More important in my judgment, is that the Fed repeated yet again that “the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected.” And it implied it still does not have a clear picture of what lies ahead for either the economy or inflation, so its policy will depend on future economic and inflation reports as they come out.
So once the usual analysis of the FOMC announcement runs its course, which it probably already has, the market will have to go back to watching each week’s economic reports, which is what the Fed said is all that it can do.
This FOMC meeting, like each of those over the last six months, confirmed that the Fed is in a bind, between the proverbial rock and a hard place. It admits inflation remains its main worry. Its previous 17 rate hikes in a row, which it halted last summer, obviously did not cool inflation off. It would no doubt like to be able to raise rates further. But it doesn’t dare because it has to also be worried about what higher rates would do to the already slowing economy. Yet it doesn’t dare cut rates for fear of what that would do to inflation. Meanwhile, a stock market correction would put more pressure on the economy.
So with a few magic words, it was at least able to stall, and perhaps even abort the market correction, obtaining the same result it would have had by providing an actual rate cut.
However, it looked like it was only traders, not investors that reacted to the Fed’s announcement. Trading volume was even lighter than normal Wednesday and Thursday. That indicated money did not rush into the market from the sidelines at all, that the reaction was only by those already in the market every day - traders. There had been a high level of short-selling in anticipation that the market correction would continue, and the quick reaction to the Fed’s announcement had all the earmarks of a panic short-covering rally. That is, short-sellers rushed to the buy side to close out short-sale positions, to achieve a neutral position, not that anyone rushed in to add to holdings.
Nothing was really resolved in either direction by the Fed’s statement, so volatility will likely continue. That is especially so if short-term traders decide at some point that the Fed’s statement isn’t going to create a sustained rally after all, and move back to the sell side to put their short-sale positions on again.
25.03.2007. (21:22)
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Bundy
Sy Harding besplatni komentar:
HE FED'S AMAZING POWER WITH WORDS! March 23, 2007.
As is usual, markets around the world waited in nervous anticipation for the outcome of the Federal Reserve’s FOMC meeting this week. As it has at each of its five previous meetings since last summer, it was a sure thing the Fed would also leave interest rates alone at this meeting. The nervousness was about the wording it might use in announcing that decision. Would it still be more worried about inflation than about the slowing economy, which would lessen the chances for interest rate cuts at future meetings? Or would it show more concern about the slowing economy, which would raise the odds for rate cuts?
Sure enough the decision was to leave interest rates alone. So with no change in interest rates to provide a clear signal of Fed policy, analysts around the world have been trying to glean what they can from the announcement that accompanied the decision. How many, and which words were changed from those used in its announcement after its last meeting in January? Did those changes of a few words indicate what the Fed is going to do with interest rates at its next meeting in May, or the one thereafter, in June?
The Fed’s announcement was not a complex 100-page scholarly treatise. The entire text of the announcement was this:
“The Federal Reserve Open Market Committee decided today to keep its target for the Federal Funds rate at 5.25%. Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters. Recent readings in core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures. In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”
Within two minutes of the announcement being released, the stock market, which had been dead flat all day, began to soar. In less than an hour the Dow was up almost 200 points. What had the Fed said that made the nation’s publicly traded companies worth hundreds of billions more in aggregate than they had been worth two minutes before the announcement?
Well, the Fed had removed the phrase “additional firming may be needed”, which had been in its January announcement. That is interpreted as meaning that at least it is not leaning as much toward possibly raising interest rates. It also gave a nod of recognition that the housing sector is still having problems. In its January announcement it said “some tentative signs of stabilization have appeared in the housing market.” This time it changed that phrase to say, “the adjustment in the housing sector is ongoing”. That was interpreted as increased recognition of the slowing economy. However, on that subject the Fed’s own wording stayed exactly the same as in its January announcement, when it said “the economy seems likely to expand at a moderate pace over coming quarters”.
25.03.2007. (21:21) - - - - - promjene spremljene- uredi komentar - obriši komentar - prijavi ovaj komentar kao spam - zabrani komentiranje autoru ovog komentara- učitavam...
Bundy
More important in my judgment, is that the Fed repeated yet again that “the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected.” And it implied it still does not have a clear picture of what lies ahead for either the economy or inflation, so its policy will depend on future economic and inflation reports as they come out.
So once the usual analysis of the FOMC announcement runs its course, which it probably already has, the market will have to go back to watching each week’s economic reports, which is what the Fed said is all that it can do.
This FOMC meeting, like each of those over the last six months, confirmed that the Fed is in a bind, between the proverbial rock and a hard place. It admits inflation remains its main worry. Its previous 17 rate hikes in a row, which it halted last summer, obviously did not cool inflation off. It would no doubt like to be able to raise rates further. But it doesn’t dare because it has to also be worried about what higher rates would do to the already slowing economy. Yet it doesn’t dare cut rates for fear of what that would do to inflation. Meanwhile, a stock market correction would put more pressure on the economy.
So with a few magic words, it was at least able to stall, and perhaps even abort the market correction, obtaining the same result it would have had by providing an actual rate cut.
However, it looked like it was only traders, not investors that reacted to the Fed’s announcement. Trading volume was even lighter than normal Wednesday and Thursday. That indicated money did not rush into the market from the sidelines at all, that the reaction was only by those already in the market every day - traders. There had been a high level of short-selling in anticipation that the market correction would continue, and the quick reaction to the Fed’s announcement had all the earmarks of a panic short-covering rally. That is, short-sellers rushed to the buy side to close out short-sale positions, to achieve a neutral position, not that anyone rushed in to add to holdings.
Nothing was really resolved in either direction by the Fed’s statement, so volatility will likely continue. That is especially so if short-term traders decide at some point that the Fed’s statement isn’t going to create a sustained rally after all, and move back to the sell side to put their short-sale positions on again.
25.03.2007. (21:22) - - - - - promjene spremljene- uredi komentar - obriši komentar - prijavi ovaj komentar kao spam - zabrani komentiranje autoru ovog komentara- učitavam...