Fed Day Off for You

Here we go again-another Federal Open Market Committee meeting that the industry keeps saying is really important. It’s almost like we are begging you to pay attention, pleading, “No really, this time is different!” The good news today is that I am giving you permission to blow off this meeting and just tune out because I do not think that we are going to learn anything important from the Fed action, nor is there likely to be a big surprise on the accompanying statement.

Considering that the economy is in the tank, people are losing jobs, house prices are still falling and the price at the pump has crossed the $4 per gallon threshold, it is hard to believe that the Fed is about to raise short-term interest rates. The conventional wisdom from March through May was that the Fed was dealing with a rattled financial system and shaky economy first and would worry about inflation later. Then on June 3rd, Fed Chief Ben Bernanke implied that later may be now.

He said, “The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.”

With that one paragraph, Bernanke shifted financial markets and investors’ perceptions about the Fed’s future intentions. After the June 3rd statement, the fed-funds futures market priced in at least three rate increases by year's end; stocks and bonds tumbled as fear of rate hikes knocked the wind out of the recovery; and in general, investors were thrown into a tizzy. Once cooler minds prevailed -- and an alleged tiny leak to the press by some Fed officials occurred, most agreed that a rate hike was not in the cards today, although futures markets continue to price-in a 43% chance of a ¼-point Fed rate hike at the August meeting.

While you relax and ignore the hullabaloo, we will parse the decision and the accompanying statement, but I really do not believe that the Fed sees inflation as a greater concern than the weak economy. I expect there will be a subtle shift to a neutral bias, allowing the central banks a bit of wiggle room as more data emerges before the next meeting in August. If something different occurs, I’ll let you know.