THOUGHTS ON THE FOMC MEETING-OUTLOOK, PART 2
by Stephen Tetreault
March 22, 2007

Hello Folks

Some of my thoughts that you need to ponder before buying into this rally...that caught me looking stupid yesterday...as I was caught like a deer in the headlights of an oncoming tractor-trailer....as the market bulls steamrolled right over me, several times.

Did Bernanke succumb to a Greenspam type of communication type screw-up? I think he did�though it may have been intentional as after the policy-bias statement was released the markets rallied like they were on steroids as the bulls prior to the announcement must have been feasting on locoweed. And they were enticed, stimulated and downright prodded by the hype on CNBC and the various bubblevision financial media channels that a slight change in one sentence in the statement was a sure fired signal that the FOMC is no longer predisposed to raising rates and that their next action will be a rate cut, most likely in May according those numb-nuts being led around by Cramer the self-professed-market-god. In my opinion it’s a huge leap of the imagination to go from a Fed that's very concerned about inflationary pressures to a Fed that's aggressively cutting rates; and the hype around this premise, was quite remarkable. As I do not believe that the FOMC chanced their bias to more dovish�.I believe just the reverse that it was more hawkish. On Wednesday we saw the emergence of the once-called �Greenspam put" as for the past 8-10years it has been assumed by most in the markets that the Fed would always cut rates to protect investors if things got dicey no matter what they were. I believe that investors are being led astray and into group think that will get them slaughtered.

As the bias statement clearly showed that the FOMC is still fixated on inflation as the main overall risk, and they even came to acknowledged that risks of a severe slowdown are growing {not a friendly sign for the markets}as we have seen great debate from FOMC members in the past for a more pronounced stance on inflationary pressures. I believe the authors of this statement were way to cute in its wording, and markets totally misinterpreted the changes as a sign of a significant switch in policy bias. It is beyond me that anyone could interpret these comments as a fundamental change in Fed-head thought, or a clear-cut signal that they will soon be cutting rates.

The indexes rallied because the Fed didn't specifically mention any risks from the subprime meltdown {which I had previously forecasted that they would not}, and this was interpreted as a head-nod/wink giving the markets their reassurance that the subprime contagions will not be a major issue for the economy (this also was a huge leap). As in their brief statement, the FOMC stated that their overall "predominant policy concern remains the risk that inflation will fail to moderate as expected." And when other minor changes such as the omission of and changing of some wording�." 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." ("Additional firming" means rate hikes) was omitted and replaced by the more neutral-sounding "future policy adjustments." The market went crazy as they think now the FOMC will be cutting rates soon. The Fed made other changes to the statement as well, mostly in response to new economic data since the January meeting as overall growth has been weaker than forecast, while core inflation has accelerated. What was totally ignored was the statement that downgraded their assessment of growth, going from "somewhat firmer" in January to "mixed" in March; and their overall assessment of the housing market went from "some tentative signs of stabilization" seven weeks ago to "the adjustment in the housing sector is ongoing" today. Clearly, the Fed-heads are signaling that the economy is weaker than it believed in January.

The Fed also changed its views on inflation, going from "readings on core inflation have improved modestly in recent months" in January to "readings on core inflation have been somewhat elevated" today�not very dovish in my opinion as the FOMC heightened its concerns about inflation, going from "The committee judges that some inflation risks remain" in January, to "The committee's predominant policy concern remains the risk that inflation will fail to moderate as expected." Clearly, the Fed is more worried about inflation than it has been before.

© 2007 Stephen Tetreault
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Stephen Tetreault
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Southern Maine, USA
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