The Federal Reserve and Our Fear of Success
In about a half hour, we'll be treated to the very last set of Fed minutes under former Chairman Greenspan's long tenure (it's going to be a very Tupac moment). Not much by way of new language is expected and any changes may be scrutinized slightly less zealously (but probably still fairly zealously) since we've heard extensive Congressional testimony from the new horse's mouth in the weeks since.
Still, as we near the inflection point, slippery as it may still be, at which the Fed will curb the rate hikes, the market is proving increasingly Fed-jumpy.
Case in point: the happy news saturating today's financial headlines and the market's party-pooping response.
With the Dow down 43 points in afternoon trading and the Nasdaq lower by a full one percent, you'd think there were gloomy happenings afoot. On the contrary, a report issued this morning by the Conference Board showed its Index of Leading Economic Indicators jumped sharply in January. The 1.1% increase was nearly double economists' already growthy expectations. What's more, strong earnings were reported by a number of bellweather companies today, several of them outstripping analysts' expectations.
Oddly, Wall Street's reaction is not jubliation, nor even indifference, but lament at the prospect that such growth will make the Fed more likely to extend their rate hike campaign (making capital more expensive to obtain and serving as a governor on corporate spending, output, growth, etc.). The market, for all its bellyaching, may have a point, although not every piece of good news can be seen as the incremental data point that will induce another quarter point, so they can curse the sunshine only so often.
The twisted crabbiness seems roughly on par with cursing your boss for giving you a raise and saddling you with a higher tax bracket. In any event, we shouldn't let the temporary red ink on the ticker tape overshadow the unmistakably upbeat nature of the day's economic news.
Update: The minutes are out.
One interesting exposition jumps out. In the policy statement following the January 31 meeting, the FOMC offered this:
The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.
That was the statement that led to such malaise about indeterminate ongoing rate hikes. I noted at the time that I read it as a distinct move to the dovish side, since it replaced the phrase "policy firming is likely to be needed."
The minutes seem to further bear that out, as expressed in this expanded language:
Although the stance of policy seemed close to where it needed to be given the current outlook, some further policy firming might be needed to keep inflation pressures contained and the risks to price stability and sustainable economic growth roughly in balance.
That seems to back up the idea that not even the one hike that everyone is expecting (at Bernanke's debut meeting in March) is necessarily a done deal, and certainly that a subsequent hike(s) to 5% or higher has not been telegraphed. If the current opinion of the committee is that 4.5% is at or close to a neutral level for the Fed Funds rate, it seems that we'd need to see far more compelling signs of inflation to warrant a move to 5% or higher.
Handcrafted by Flip on February 21, 2006 |
TrackBack URL for this entry:
Listed below are links to weblogs that reference The Federal Reserve and Our Fear of Success: