Stop Believing The Fed Is Lying To You

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Includes: DIA, IWM, QQQ, SPY
by: Matthew Allbee

Summary

Markets seem to have largely disconnected from the Fed since the start of the year, showing a growing distrust of what members say.

Credibility is vital to the FOMC, though. They would never throw it away purposely.

In this article, I explain why you should listen to the Fed's warning about a rate hike and what I believe the Fed has been trying to say all year.

If they say there is a good chance they're going to raise rates, there is a good chance they're going to raise rates.

Over the past months, I have been astounded at the reaction of Fed watchers to statements released by FOMC members. There seems to be a great deal of distrust growing between the Federal Reserve and financial markets, with financial markets now routinely refusing to acknowledge what Fed members are saying about the future of monetary policy.

Much of this, it seems, is borne by the supposed mismatch between statements and actions of Fed members since the December rate hike. I'll admit this is understandable. People don't like to feel like they are being lied to and manipulated.

It is unlikely that the Fed would try to deceive, though. For the Federal Reserve, maintaining credibility is arguably even more important than its official dual mandate. This is because, without credibility, it is nearly impossible to maintain control over monetary policy. Threatening action is as important as actual action to the Fed.

Truthfully, the months since the rate hike have been volatile. This can be discerned simply by looking at a chart of the S&P 500. The Fed needed to caution markets that they would not raise rates if it was causing the economy harm. The Fed doesn't need to raise rates because the economy is heating up - there is no imminent need. This is the attitude that I believe the Fed has been trying to portray since the start of the year.

Markets are finally seeming to understand this after yesterday's remarks about June being a live meeting. Chances of an interest rate hike in the coming months have skyrocketed, as told by the futures markets. Make sure you have also adjusted your expectations.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.