The Dovish Pause
"However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand"
>
I got this totally wrong. As the money quote above shows -- not only did we not get a 1/4 point hike, we didn't even get Hawkish comments.
After the initial market pop, we quickly rolled over. Nasdaq flipped negative, as did the SPX a few moments later. The Dow gave up all 45 points it rallied after the announcement, and then turned negative.
Does this mean the market does not believe the Fed?
As we noted on Monday: Careful What You Wish For -- perhaps the Fed should have raised after all . . .
~~~
Here's the full policy statement:
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.
Readings on core inflation have been elevated in recent months, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.
Nonetheless, 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, as implied by incoming information.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.
Tuesday, August 08, 2006 | 02:20 PM | Permalink
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Comments
GREAT job FOMC.
The market will digest this well....it's the 3rd equity move that you trust.
UP....down....then UP!
Posted by: ss | Aug 8, 2006 2:26:50 PM
the fed has once again shown itself to be using kid gloves when it comes to inflation. they better hope the tea leaves are correct or we could be looking at 50bps hikes in the near future.
Posted by: Richard | Aug 8, 2006 2:27:13 PM
"partly reflecting a gradual cooling of the housing market"
Bernanke to housing market, "Quit your whining, you're the sacrificial lamb."
Posted by: Craig H | Aug 8, 2006 2:31:45 PM
Wimps. 9-1 voting on the pause too. Could we please get some adults to manage the Fed? Please?
Posted by: Sherman McCoy | Aug 8, 2006 2:33:11 PM
I took the bounce as an opportunity to short HAL, given what I remember you saying about markets tend to perform poorly after the Fed halts its increases.
Posted by: Jack | Aug 8, 2006 2:33:28 PM
Ummmm.... I wonder how the dollar is doing....
Posted by: albiegf13 | Aug 8, 2006 2:35:14 PM
The dollar briefly got drummed, bounced, and is getting drummed again. Kind of the inverse of the Dow: bounced, drummed, bounce.
Posted by: M.Z. Forrest | Aug 8, 2006 2:39:20 PM
At this time the Fed can't do anything about inflation.
Inflation is baked in the cake by commodity prices of the past few quarters and profligate fiscal policy of the past five years.
Option 1) Raise rates and then have everyone raving about armageddon when inflation happens.
Option 2) Pause and then stoically stand back and take the flak for the inflation while maintaining the market's faith that they could do something about it going forward.
The Fed chose option 2. By pausing the rate hikes they set themselves up to at least maintain the illusion that they could have done something. From the point of view of preserving their institutional cred, this was the only viable option.
Posted by: foo | Aug 8, 2006 2:43:30 PM
I think the market said, in order:
- Pause! (brief pop)
- he used the word 'inflation'! (brief dip)
- omg he's totally kidding! (rebound)
I think participants will be confused for a while. Except for the dollar -- that's dropping and should drop more.
Posted by: wcw | Aug 8, 2006 2:47:36 PM
From the standpoint of cred the "pause but not necessarily done" phrasing is suggestive of a Fed that may no longer see much benefit in Greenspan's gradualism. Raises the distinct possibility the next FOMC move is NOT going to be a quarter point.
Posted by: RW | Aug 8, 2006 2:50:46 PM
The money sentence is hard for me to reconcile with the data you have been posting here at The Big Picture.
"However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand"
Barry: Are you seeing any currently visible indicators or trends that would support inflation pressures moderating over time"?
I liked the plausible deniability of the language "reflecting contained inflation expectations" where the person holding these expecations is not mentioned - maybe it's the tooth fairy.
Posted by: Trend Watcher | Aug 8, 2006 2:52:01 PM
BR,
I don't think you were that far off the mark:
"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."
really, just good politics: they left a door open for future hikes that you could drive a mack truck through.
the fact that Bernanke's guessing a slowdown is coming-- which SHOULD dampen inflation expectations- is no different than a half dozen incorrect predictions I can think of, off top of head, that Alan Greenspan made over the past few years (ie, commodity prices will subside).
Regardless, the Fed takes its cue from the bond market. The bond market said pause, so they paused.
jw
Posted by: jw | Aug 8, 2006 2:54:06 PM
Would have expected a gold rally with this decision. Perplexed.
either
1. Mr Market thinks the fed got it right and inflation is in the rear view mirror
2. The adults haven't placed their bids yet.
Given dollar weakness, and rising real inflation [in my view], i vote for #2.
Posted by: HT | Aug 8, 2006 2:54:16 PM
Perhaps the market is reacting to this ominous phrase:
"factors restraining aggregate demand"
Posted by: babycondor | Aug 8, 2006 2:55:10 PM
No rally in the 10 year bond. It sold off. That's interesting.
Posted by: Craig H | Aug 8, 2006 2:55:22 PM
No, the TIPS market. Cf http://www.treasury.gov/offices/domestic-finance/debt-management/interest-rate/real_yield.shtml
Real yields are all ~2.3%, while nominal yields are ~5%. Those expectations sure look contained to me.
Posted by: wcw | Aug 8, 2006 2:57:10 PM
You could interpret this latest move as the best of several bad options, if you believe that we're headed for a recession later this year, early next year.
Yes, I know that the Fed is chartered to manage inflation and employment, but does anyone really think that the spectre of a recession during an election year does not factor into their thinking?
Posted by: Brian A | Aug 8, 2006 2:57:39 PM
Guess the pause was baked into the market, with maybe a little expectation of a permanent pause.
Posted by: Royce | Aug 8, 2006 2:59:35 PM
hello from germany,
it will be interresiting to see if the $index hold the keymark around 80!
a funny reading about the talk during the bubble from cramer, kudlow etc
http://immobilienblasen.blogspot.com/2006/08/wall-street-talk.html
jmf
Posted by: jmf | Aug 8, 2006 3:05:40 PM
Yep. They didn't get their "We are stopping" language AND the 9-1 vote means it was a bit "spirited" around the table in the discussion. You can bet a quarter point got a good hard look (Sorry, Fed Funds futures) and that others went along with the vote just for protocol even though they argued for the raise.
Posted by: Mark | Aug 8, 2006 3:11:53 PM
The big question: Do we get volume tomorrow and a trendline?
Even with the gyrations, the volume is still weak.
Posted by: M.Z. Forrest | Aug 8, 2006 3:13:56 PM
"GREAT job FOMC.
The market will digest this well....it's the 3rd equity move that you trust.
UP....down....then UP!"
What about the FOURTH move?
Posted by: Mark | Aug 8, 2006 3:14:30 PM
100 point descending triangle on the $INDU 1 minute chart.
Posted by: Craig H | Aug 8, 2006 3:14:36 PM
inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand
by putting the "contained inflation expectations" first, "cumulative effects of monetary policy" is de-emphasized. then the allusion to "other factors" nicely confuses matters (which other factors?).
the real point, nicely obfuscated, seems to be "as we guide the economy through this recession, prices (i.e. your wage, your home, whatever else you need) will stabilize. don't buy anything ya don't need, k!"
Posted by: j d ess | Aug 8, 2006 3:15:02 PM
There goes the TRANNIES... under 4300.
Look out beloooowwww...
Posted by: tjofpa | Aug 8, 2006 3:16:07 PM
