The Fed Remains Dovish - Why?

If you were looking for the Fed to signal One and Done, that the FOMC was not worried enough about the economy to stop cutting rates, that stresses in the markets were behind us, and that the Fed was concerned about the dollar, then Wednesday's announcement would not have pleased you. In fact, the Fed statement gives us no reason to think that the previous mindset of the FOMC has changed.

Here is the FOMC's statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.

Recent information indicates that economic activity remains weak. [Emphasis added] Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, [see the FOMC's past statements on inflation here] reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta, and San Francisco.

Now, this is slightly less dovish than the last statement, which you can read here.

Wednesday’s meeting was not what the market was looking for. Surprisingly, on two fronts, the Fed remains vigilant regarding markets and gives us no reason to think this is the last rate cut.

It is not much of a surprise that the Fed noted the economy is weak. It is. What was a bit of a surprise was that the Fed only gave a wink and a nod to inflation. Market participants were hoping that the Fed would take a more pro-active stance on rising prices and provide underpinnings on the dollar. That did not happen.

Second, the Fed highlighted continuing problems in the financial markets. Equities have been in the mindset that the problems in credit are behind us. The Fed thinks otherwise.

There is nothing in this statement to make us think that the Fed is done. In fact, in my opinion, I read this as there being at least one, maybe two rate cuts to come, especially after the advance GDP print Wednesday morning.

The advance number has GDP rising an anemic 0.6%, same as last quarter. The only reason why the economy did not slip into negative territory is because of an inventory build which contributed 0.8% to GDP.

The two areas of strength were exports, which rose 5.5%, but down 1% compared to last quarter, and government spending, which rose 4.6% versus 0.5% in Q4. A weak dollar and rising government expenditure is not a particularly good indicator of a robust private sector.

Services rose 3.4% and personal consumption increased 1.0%, though consumption was down from 2.3% last quarter. I take little comfort in the consumption figure since retail sales have risen a mere 0.3% over the past six months. Durable goods declined 6.1% and nondurable goods fell 3.4%, and non-residential fixed investment fell 2.5% while residential investment was down a staggering 26.7%.

The Fed also referenced core inflation (inflation excluding food and energy costs) as stabilizing. Given that oil has risen from $10 to $120 in a decade and people dying in food riots around the globe, why is the Fed even mentioning "core" inflation anymore? Why do people even pay attention to this "core" inflation nonsense?

Ultimately, the Fed actions and statement is bullish for commodities and bearish for equities. Equities are approaching critical levels of resistance, but my gut tells me that we could move higher still. Having trolled through a couple hundred charts of stocks that had been in recent downtrends yesterday evening, many still seem to be basing and are not rolling over, at least not yet. And despite the bullish nature of this statement, the charts still look poor for commodities.

That being said, I have more confidence that we have not seen the top in commodities and that equities will ultimately be lower than from these levels.

Comments

[sivere]

Congress has allowed the Fed has use its consitutional authority to completely mess up our financial system. It is time to

TakeBackTheFed.com

[the finalhorseman]

congress is making too much money to stop the fed...who do you think made all that money during the bear stearns mess? uh...like whatever happened to insider information regulations?

the original jp morgan...the man...helped start the fed in 1913

coincidence...isnt it?

[nukldrager]

President Woodrow Wilson after creating the Federal Reserve said:

"A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men."
~ Woodrow Wilson from wikipedia

The history of the fed is fascinating andlike the book say's, reads like a crime story. It's also complex in that who would want 485 lawyers (Congress) arguing fiscal policy. Difficult re how do we wrest power from the most powerful group in the world. Disgustingly cruel with respect to it's miss management of America's money. And, complex again because there has to be a strong, intelligent, and legal
regulatory system for the economy. The fact that congress made it legal doesn't change the fact that it's still un-constitutional. The fed serves the banks, not the electorate.