The Federal Open Market Committee issued a statement this week and no one knows what it means.
A Forbes headline on Wednesday said, “FOMC Statement Dovish,” but on Thursday, the same reporter updated his story and the headline referred to the, “Hawkish FOMC Statement.” FXStreet called the statement, “less dovish than expected” on Thursday and in a separate story called it “slightly less dovish.” Meanwhile, Business Insider said, “It’s ‘hawkish’ on balance.”
So is it a hawk or a dove?
What a Dowk looks like.
It’s neither and both; it’s a dowk, with the head of a dove and tail of a hawk. Or maybe it’s a hove, with the head of a hawk and tail of a dove. Whatever it is, it’s not flying.
Markets have deemed that it wasn’t dovish enough or maybe it was too hawkish. Some expected a strong statement about continuing (or even increasing!) bond purchases because of the temporary government shutdown’s expected drag on economic growth … as if the economy were growing before the shutdown.
Instead, The Fed settled on more of the same. As Business Insider put it: “There were no changes in the policy rate or adjustment to $85bn asset purchases. The committee made few changes to the statement and keep the key phrase ‘decided to await more evidence that progress would be sustained before adjusting the pace of purchases.’ “
In other words, it’s more of the same, which should be a surprise to no one. In May, Fed Chairman Ben Bernanke, America’s Hamlet, became America’s Hamlet. Like his Danish counterpart, he pondered aloud: “To taper or not to taper?”
The result was nearly as tragic, as markets were rocked. Bernanke assured everyone he didn’t really mean it and markets stabilized. All was good in the kingdom. So why wouldn’t he ride out the rest of his term and let quantitative easing and the long-overdue tapering become Janet Yellen’s problem. His successor is an easy money proponent anyway.
In a previous post, we quoted a Goldman Sachs prediction that The Fed would begin relying less on QE and more on “forward guidance” as a means of giving the economy a boost. Forward guidance is merely a greater reliance on saying than doing. It’s not the bond buying that moves the markets, it’s talking about it that moves the markets.
Toward that end, check out the accompanying chart and see how the word count of Fed statements has increased.
The Only Certainty Is Uncertainty
The reaction to The Fed’s statement is in keeping with the ongoing theme of “uncertainty,” which could very well be the theme for not only the Federal Reserve Board, but the Obama Administration and the U.S. Congress. And, of course, it’s the theme for the U.S. economy as well.
When uncertainty exists, businesses take no action. They sit on trillions in cash, as they don’t know whether to hire or fire, expand or contract.
Investors, likewise, get stuck with more money in cash than they’d like, because there is no certainty about the direction of either the stock market or the bond market. That wasn’t so bad in the pre-QE days, when stock and bond prices generally moved in opposite directions. At least then, having an allocation of both could mitigate risk, because gains in one market could balance out losses in the other.
As quantitative easing moves the markets higher still, in spite of weak earnings, slow growth and high unemployment, the probability that it will all come toppling down increases and investing becomes even riskier. So investors sit on their hands and their cash.
Washington, though, is the nation’s epicenter of uncertainty. This fall, we’ve seen the uncertainty over reaction to Syria’s crossing of the red line, followed by uncertainty over the debt ceiling. And now we face uncertainty over the future of our healthcare system.
The federal healthcare exchange is making it nearly impossible for most people to sign up for insurance at the same time that insurance carriers are canceling policies for millions of Americans because of Obamacare regulatory requirements. The goal was supposed to be to provide insurance for all, but doesn’t this do just the opposite?
Those who have made it onto the healthcare exchange are reporting sticker shock, as only insurance that meets all of the new federal requirements can be sold there. The goal was supposed to be to lower the cost of health insurance – which is why it was called the Affordable Care Act – but doesn’t this do just the opposite?
But don’t worry. Since the only agreement that was reached on the debt ceiling was to delay making an agreement, the debt ceiling debate will be returning soon, taking our attention away from Obamacare, while keeping us all uncertain about what happens next.
The net effect of all of this uncertainty has been paralysis. We all wait for the housing market to improve, for the unemployment rate to go down, for the economy to grow at a normal rate. We find encouragement in a little movement here or there, but good news is always balanced with bad news. Put it together and you have a flat line.
If only someone could make a decision.