The Fed Is Telling Us To Listen

Last Friday, the
Fed published a paper titled
‘Central Bank
Talk: Does it Matter and Why?’ The timing of the paper is curious as we have an
FOMC meeting Wednesday, and the statement accompanying the meeting will probably
have the biggest bearing on the intermediate term direction of interest rates.
Hmmm… what a cute coincidence.

As you can probably guess, the paper examines the
role that statements by Federal Reserve officials have in shaping investor
expectations of interest rates. And, to everyone’s surprise, the authors of the
study conclude that statements by the Fed indeed ‘have had a considerable
influence on short and intermediate-term interest rates.’

What to make of this?

First, the Fed’s statement tomorrow will probably
be the most important determinant for ‘intermediate term rates.’ Remember, the
Fed was able to send Treasury yields to multi-decade lows without cutting rates,
as evidenced in the chart of the 10 Year Note yield
(
$TNX.X |
Quote |
Chart |
News |
PowerRating)
below.


Second, we can expect the Fed to continue to
‘jawbone’ or talk rates down, as the current ‘lack of inflation’ gives the Fed,
unlike in previous recoveries, the ability to keep rates low–even in the face
of economic growth. Allowing interest rates to rise now would mean cutting off
the lifeline to consumers (via housing) and businesses (via low cost of
capital).

Please feel free to contact me with your comments
or questions.


Edward Allen

edwarda@tradingmarkets.com