The New Fed: Who Are They...?
A: I feel the need to defend myself. Exactly six days ago I went on record as saying, "If I'm right, than in 4 weeks the 10YR Treasury yield will be at least 25 basis points (0.25%) higher...". Then, four days later the fed announced no change with monetary policy but a change in statement. The fact is, after digesting the statement over the past day or so many economists, anaylsts, and traders are getting to know the new fed chairman is different than what we first expected. This is a new fed, and we MUST learn to live with the idea that we may not know what all the statement changes mean for a while. That is exactly what happened in the past few days; here is why.
Here is what I said back on March 17th:
The 10YR yield ended the week at 4.54%. If inflation fears start to come out again as I expect them to, the yield on the 10YR will be closer to 4.75% by mid April to account for the possibility of more fed rate hikes down the road.Bam, there it is. On the record is my thinking based on the fundamentals I noticed at the time; inflation pressures were just too high to consider stimulating economic growth through easing monetary policy.
But this fed is not the old fed. Its an entirely new fed that is yet to distinguish its true character to the tradable markets. We don't know Bernanke yet! And with their most recent NO CHANGE IN INTEREST RATES but change in statement issued, we are beginning to wake up to this fact; we don't know what the capabilities of this new fed are yet.
Here is the statement that was removed in this weeks fed statement that caused such a stir on the street:
"The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."Here is the change that they hit the markets with a few days ago, as they removed the above sentence and replaced it with:
"Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."Ahh, right there! ...FUTURE POLICY ADJUSTMENTS will depend on the outlook...With this statement the stock market immediately interpreted it to mean that the fed has switched from a tightening interest rate bias to a neutral interest rate bias; the clear first step on the way to a fed cut.
As for me, those of you who actually read my stuff know that I am an inflation hawk and believe very strongly that the fed's # 1 job is to fight against inflation. But what is the real job of the fed?
Here is what I found on their site at the federalreserve.gov mission page:
So what did the fed really do? Upon further digestion of this first ever radical change in statement issued with the most recent fed decision, it's hard to ignore the newly inserted line "...the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected...". Although it originally seemed that the removal of the 'any additional firming that may be needed..." phrase was thought to meant imminent rate cuts, look at what the 10YR did over this 5-day chart taking note of the move AFTER March 21st and a day of digesting the change in statement:
The initial FALLOFF in yields and SURGE in stock prices was the immediate reaction, prompting me to write this "Ben Bernanke's Mistake - Dissing Inflation" post. My first prediction of higher yields due to the fundamentals happen to be more accurate than I thought after this fed statement was issued. I felt like, 'this is the fed, they know their sh*t, I must learn as quickly as possible what they do and how they do it for future references and investment decisions'. But looking at what the 10YR did and how the yield responded back to what is really going on in the world makes me wonder what this fed is really up to! Honestly, I have no clue.
They can either:
CUT RATES - Because they feel that protecting economic growth is more important than current inflation indicators and that a cooling economy would in effect lower inflation pressures.
HOLD RATES - Because they don't know their true identity yet and what might unfold in the near future. Likely course.
RAISE RATES - Because they still admitted that their #1 fear is that inflation will not moderate as expected. What I think will happen.
Hence my prediction BEFORE the fed meeting of 10YR yields at 4.75% by mid April. Since the fed meeting and AFTER the initial reaction, 10YR yields went from a low of 4.52% to a close of 4.613 2 days later. Quite a move.
This tells me my initial feelings are reasonable and that many people may be mis-interpreting this move by the fed to mean rate cuts are in the works. I just don't see it. As before, inflation didnt ease in the past few days, it remains exactly the same. The only thing that changed is that we realized that this fed is a mysterious one and that we are still learning what their actions mean.
UrbanDigs Says To Those Fed Watchers: This is the first major change worth noting what the ultimate reaction is! Take note, is all I can say so you will be wiser when a similar situation comes up down the road and this same fed does a duplicate maneuver.
