Listening To The Fed…
Today the FOMC trimmed the Fed funds rate by 25 basis points, the lowest
since 1958. More importantly, however, the Fed gave itself some wiggle room
to keep long-term rates, such as that of the 10 year note in
check and thus prevent a premature rise in yields from impeding the economic
recovery that is currently taking shape.
Let’s go through the statement shall we…
“The Committee continues to believe that an accommodative stance of monetary
policy, coupled with still robust underlying growth in productivity, is
providing important ongoing support to economic activity. Recent signs point
to a firming in spending, markedly improved financial conditions, and labor
and product markets that are stabilizing.” Basically, the Fed is confirming
that the economy is indeed picking up–obviously.
The statement then goes on to read, “The economy, nonetheless, has yet to
exhibit sustainable growth. With inflationary expectations subdued, the
Committee judged that a slightly more expansive monetary policy would add
further support for an economy which it expects to improve over time. The
Committee perceives that the upside and downside risks to the attainment of
sustainable growth for the next few quarters are roughly equal. In contrast,
the probability, though minor, of an unwelcome substantial fall in inflation
exceeds that of a pickup in inflation from its already low level. On balance,
the Committee believes that the latter concern is likely to predominate for
the foreseeable future.” This second part of the statement is really the most
important part–as it is where the Fed is signaling to the markets, in my
view anyway, that a lack of inflation will give it room to keep rates low, or
capped, for an extended period of time.
Since we have basically reached the bottom of the barrel in short term rates,
the Federal Reserve will rely more and more on “jawboning” to influence
interest rate expectations (remember, the Fed aptly released its study last
Friday tiled “Central Bank Talk: Does it Matter and Why?”). This more vocal
approach could very well involve possible threats of using “unconventional”
methods, to effect policy. It is therefore imperative that investors be
cognizant of any scheduled speeches and testimonies given by the various
members of the Board of Governors in the weeks and months ahead, as this is
where they will attempt to keep rates from moving up prematurely.