The Federal Reserve meets next week, and this meeting will be a biggie. I’d love to be a fly on the wall (and maybe NSA will have some flies on duty), but the minutes from the meeting won’t be released for another three weeks.
We’re at an interesting time for the market because normally, the jobs reports and Fed policy statements are by far the most important economic events. But now, I’d say the release of the minutes of the Fed meetings has taken center stage.
Why’s that? It’s because investors are on the lookout for any sign that the Fed is going to wind up their massive bond-buying program. The stock market has clearly been aided by the Fed’s bond purchases. Heck, the Fed even said that was one of their intentions. But I think some investors believe the entire rally has been due to the Fed’s pulling the bull along. That’s a giant overstatement. But you don’t have to go far on Wall Street to find folks who think: no Fed help, then sell everything you got. They’re wrong, but they can cause us headaches.
My position had been to ignore this fear-mongering. I didn’t think the Fed was even close to considering a change in its policy before the end of the year. I still believe the Fed shouldn’t make any changes until the moribund jobs market gets better or inflation starts to heat up, and there’s no sign of that happening. But, for some strange reason, I’m not allowed to vote on the Federal Open Market Committee.
I’m now concerned that the Fed may start tapering off their bond purchases before the year is out. What happened to change my thinking is that last Friday, Jon Hilsenrath of the Wall Street Journal, who’s widely understood to be Bernanke’s go-to media conduit, wrote:
Federal Reserve officials are likely to signal at their June policy meeting that they’re on track to begin pulling back their $85-billion-a-month bond-buying program later this year, as long as the economy doesn’t disappoint.
Whoa. I didn’t see that coming, and that caught a lot of people’s attention. I, for one, am going to assume that’s Bernanke speaking. Note that he didn’t say they “will pull back,” but merely, “they’re on track to begin pulling back.” Of course, I can say that I’m “on track” for a lot of things. It doesn’t mean they’re about to happen. Still, the Fed wouldn’t be floating this in the media if they didn’t think it was important. So this is a big deal.
We also have to remember that the Federal Open Market Committee is just that—a committee. Bernanke is the head of it, but a majority can oppose him. It’s happened before. Despite Hilsenrath’s (cough cough Bernanke’s) article, I’m inclined to believe the Fed won’t make any changes just yet, but I can’t be sure. I suspect that there are some Fed members who think it’s time to end the buy-bonds frenzy. Perhaps Bernanke wants to adjust the language and spell out clear timelines to appease those folks.
Even if the Fed does start tapering off, I don’t subscribe to the view that the stock market is toast without the Fed’s help (and a lot of people do subscribe to such a belief). Let’s remember that there are some definite bright spots in the economy. The housing market is better, and budget deficits are shrinking. I think a key driver of what the Fed will do can be found in the Fed’s economic forecast. Hilsenrath notes that the Fed has been consistently over-optimistic about what I’ll generously call “the recovery.” The problem is that fiscal policy has been holding back the economy. At least, that’s Bernanke’s view. The economy is, so far, running behind the Fed’s forecast for 2013. So either the Fed will lower their forecast next week or they’ll double down and expect the economy to ramp up later this year. The stock market believes earnings will ramp up, too.
There’s No Reason to Fear the Fed’s Changing Course
My overall view is that there’s a lot riding on this second-half recovery. If it indeed comes, a lot of problems will be taken care of. Investors are afraid of the Fed’s tapering off, which may not happen soon, and even if it does, there’s no reason to be so scared. My advice to investors is to stay focused on our Buy List stocks, but be prepared to see some volatility coming our way. If the market gets weak, it will be a great opportunity to buy, but don’t jump in just yet.