Fed Minutes: An Answer to the Question of "Duping"

Includes: DIA, QQQ, SPY
by: Jeff Miller

On RealMoney last Friday we made an observation that we did not see suggested anywhere else -- rather rare in the days of the blogosphere. (Readers are invited to send the many pointers showing us to be wrong and lax in our reading!) Here was the comment:

On Wednesday we will get the minutes from the FOMC meetings of January 30th and January 22nd. This will provide a little more color on the discussions leading to the rate cuts. I am more curious about whether there were additional meetings, not yet disclosed, where no action was taken. If past practice is followed, we will find this out on Wednesday. This might tell us something about whether an inter-meeting move was seriously contemplated before January 22nd.

Yesterday's minutes revealed that there was, in fact, a conference call meeting on January 9th. As is customary when no policy action was taken, the summary of the meeting was rather sparse. Here is the key part:

Most participants were of the view that substantial additional policy easing in the near term might well be necessary to promote moderate economic growth over time and to reduce the downside risks to growth, and participants discussed the possible timing of such policy actions.

The minutes also covered the meeting of January 21st when the Fed cut rates by 75 bp's, little more than a week before the next regularly scheduled meeting. We suggested at the time that the FOMC must be prepared for more cuts right away. The motives behind the Fed move were questioned, with many suggesting that the Fed was "duped" or stampeded into action by moves in equity markets, a "folly". Here is a key segment of the minutes from that meeting (emphasis added):

Such an action, by demonstrating the Committee’s commitment to act decisively to support economic activity, might reduce concerns about economic prospects that seemed to be contributing to the deteriorating conditions in financial markets, which could feed back on the economy. However, some concern was expressed that an immediate policy action could be misinterpreted as directed at recent declines in stock prices, rather than the broader economic outlook, and one member believed it preferable to delay policy action until the scheduled FOMC meeting on January 29-30. Some members also noted that were policy to become very stimulative it would be important for the Committee to be decisive in reversing the course of interest rates once the economy had strengthened and downside risks had abated.

Why is this important?

There was a lot of punditry after the January 21st meeting suggesting that the Fed was not paying attention, that the committee was in panic mode, that they were reacting to markets rather than the economy, that they were "behind the curve", and they acted outside of their mandate.

These allegations were widespread and got plenty of play in the mainstream media. This is part of the hunger for content that we have described, where bloggers, financial television, and print media alike, all love to feature people making bold statements. It is likely that many investors bought (or rather sold) into this reasoning, helping to create the current market climate.

At the same time we suggested that pundits, while free under the 1st Amendment to offer any opinion, no matter how silly, might benefit from actually learning something about the Fed as an institution. Especially helpful is looking at actual past meeting transcripts, something that few bother to do.

Our analysis, drawing upon old transcripts and the crucial Mishkin speech, got little attention. There is more interest in the Monday-morning quarterbacking of the Fed, rather than in actual understanding. We continue to believe that studying behavior will benefit investors, partly because so few bother to do it.


Here are a few things to think about.

  • These meetings do not have leaks. Not the January 9th meeting, nor the meeting where the Fed set up the TAF facility and swaps with foreign central banks. The minutes show that scores of people were in attendance, yet there were no leaks. Interesting. The Fed is capable of surprise.
  • It is a mistake to think of the Fed as a "unitary actor." It is difficult to "dupe" a committee. That is one of the reasons why the FOMC structure exists. We saw various comments yesterday that the Fed message is confusing, since there are so many voices. One CNBC pundit (who shall go nameless here) argued for reducing visibility! This is astounding. Market observers who relish information from thousands of different company CEO's on conference calls, and hundreds of different analysts, are suddenly incapable of interpreting data from a few Fed members. More information is better. Interpreting the information is a routine task for those with social science training, but that is not a typical skill of traders and fund managers.
  • The Fed members are following the Mishkin approach, concerned about overall economic effects. Market "disruptions" affect the economy, and the FOMC members understand this. They are not "in a box" since they have and will react to the most pressing considerations. Right now, that is the threat to economic growth. They are aware of potential inflationary effects and arguments about moral hazard, but these are not the imminent issues.
  • Most importantly, there may be another Fed surprise. This Fed has been aggressive and imaginative in addressing credit issues. There may be another action -- outside of the normal realm of interest rate reduction -- should that prove necessary.

The nature of financial media and blogs means that pundits will be pundits. No special knowledge is required to offer an opinion, to get quoted, or to get on TV. This means that the burden is on the consumer to figure out whether the source actually has a relevant insight. It is a continuing challenge. If the reader or viewer has not himself done the relevant homework -- and few of them have -- they are at the mercy of the financial media.

It would be helpful if the big-time bloggers from mainstream media did an occasional review of subjects like this. They could do an introspective analysis of their own work, and also take a look at their sources and how they have done. This would be a useful service to their readers. Caveat emptor works when they succeed in providing a range of opinions. When they do not, the process leads to a lack of balance in coverage.