Get ready to get back on Ben Bernanke’s merry-go-round. The Federal Reserve’s Open Market Committee meeting is set for April 24 and 25, and though the meetings themselves are about as fun as watching paint dry (no insult to paint intended), the outcome of those meetings somehow manages to create fireworks for the market.
Here’s where the Fed left off the last time, and what’s likely in store this time around:
Where We Were
The post-meeting comments from the last time the FOMC met in March were pretty predictable. There was “moderate economic growth,” though the committee also saw “significant downside risks to the economic outlook.” Still, the Federal Reserve’s heads felt unemployment would continue “gradually” falling, while assuming “inflation will run at or below the rate that it judges most consistent with its dual mandate.”
Boring stuff? You bet, and boiler-plate stuff at that; it’s pretty much what Bernanke has been saying for a couple of years, while he’s led the Fed to keep interest rates as close as possible to zero without actually making them zero. What the Federal Reserve has done following these meetings, as well as the market’s response to those moves, however, is a lot more interesting.
Just as a refresher, a third round of quantitative easing (or QE3) is still not a foregone conclusion, and is definitely on hold until further notice — if it’s in the cards at all. The so-called Operation Twist, however, is still under way. Through it, the Fed continues to apply pressure on interest rates by buying up Treasury bonds; the greater the demand for bins, the lower interest rates get. The 10-year Treasury seems to be the weapon of choice, since so many other interest rates (like mortgage and corporate loan rates) are tied to it, though the buying effort generally pulls all bond yields lower.
All well and good, but the question now is, what — if anything — will change following this month’s FOMC meeting?
Answer (and prediction): Not much.
That doesn’t mean the market isn’t going to respond to the meeting, though.
Where We’re Going
Like it or not, and agree with it or not, the Fed’s bias is to do nothing and assume things will work themselves out. And truth be told, in most cases, less tinkering probably is a better response than more tinkering. Even when the economy is hinting at trouble, the odds of any meaningful action are pretty low.
Case in point: After the January FOMC meeting, a couple of the committee’s members expressed alarm at the way things were going, or at least not progressing, at the time. It wasn’t unmerited concern, either. Remember, the stock market’s 2012 rally wasn’t nearly as convincing then as it is now (in retrospect). Indeed, it wasn’t even clear at that point if the young rally was just a little bullish volatility following a disastrous end to 2011. Also at that time, the unemployment rate still was stuck around a high-ish 8.3%. Point being, a shot in fiscal the arm could have been justified at the time. We got none.
So what kind of impending disaster actually prompts Fed action? Well, the current Operation Twist was born out of last August’s market implosion, which ultimately was fueled by the debt-ceiling holdout and credit-rating downgrade for the U.S. — pretty heavy stuff that would have gotten even nastier had Mr. Bernanke done nothing.
We’ve got nothing like that now. If anything, we’ve got even more encouraging news. Most forecasts for Q1’s GDP growth are around 2.5%, following Q4’s surprisingly high GDP growth of 3.0%. The unemployment rate has faded to 8.2% in the meantime, and is expected to reach 8.1% when reported for April. Stocks still are well up since January, too, even with the recent correction. Inflation is tamed.
Not that these are the only factors Ben Bernanke considers, but let’s face it — there’s not a lot for him to grouse about compared to where we were just a few months ago. There’s even less motivation to make a tweak.
So if we’ve been getting the same post-meeting language for a couple of years (even verbatim much of the time), what in the world is the big deal every month?
As was said back on March 27, most of the market’s major moves are mentally made before they are physically made with money. Traders just need an excuse prompt to pull the trigger. The Fed chairman’s comments are a credible prompt. Ergo, the reaction to next week’s FOMC meeting — rather than the meeting’s outcome itself — is the important piece of the puzzle. The reaction is a glimpse of how investors are thinking, which is ultimately how investors will act.
Given the lack of need for it, there’s not likely to be any ramped-up accommodation effort from the Fed next week — we don’t need it. If the market responds with a sell-off anyway, though, then that “glass half-empty” point of view will keep weighing in on stocks.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.