Ho hum, began the day. As with all trading days in which we await the FOMC statement and Fed Funds action. The major indices hover right around the unchanged mark. A little above for the S&P, a little below for the Dow. You know, playing the waiting game.
Then the Fed release, and BOOM! The Dow Jones shoots up nearly 200 points before finishing the day up 159 and change. The NASDAQ finishes the day on its high, up nearly 2% for the day. What a reaction! Surely, the Fed made a strong statement, right? Surely, they made clear in Bernanke's refreshing non-Greenspan speak (as in, we understand what he is talking about) that rate cuts are impending, right? Right?
I dunno. If they did, I missed it. The market optimism resulted from one small change in language from the January 31, 2007 statement.
January: "The Committee judges that some inflation risks remain. 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,"
Today: "the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and evonomic growth,"
That's it. 159 points because of the omission of the words "additional firming." That and some other words to make it grammatically correct. But that's not all they said. So, what else did they say in this four paragraph market super charger?
Here's my interpretation of today's statement. Please keep in mind that I am not an economist or any other title that would imply that I understand the Fed any better than you. I'm literally just reading the words that they wrote.
"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent."
My interpretation: Self explantory.
"Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters."
My interpretation: We're getting signs of inflation and signs of slow growth. That sucks. It's so much easier when we get just one or the other. Also, the rate of foreclosures and the sub-prime meltdown may have an impact on the broader economy. It's still too early to tell. Despite this, we don't think a recession is likely this year.
Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.
My interpretation: CPI and PPI were higher than we expected. Despite being wrong last time, (January statement: "Readings on core inflation have improved modestly in recent months.") we don't think inflation will continue to be higher than we expected, but expansion in China among other places is causing demand for energy, metals and other materials to remain high. This has an inflationary impact.
Sorry, that was still confusing. Let's try it this way: Inflation's up, but it could go down, or it could go up.
"In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."
My interpretation: In case you're wondering if we are more likely to lower rates to help growth and the housing sector, or raise rates to fight inflation, we're inflation fighters. By using the word "adjustments" instead of "firming" we are not giving any indication as to whether our next action will be up or down. You make the call.
If only people understood that the Fed creates inflation in the first place.
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End the fed and live much better
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