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Fed's Hint at Further Easing Leaves Wall Street Guessing

Huh?

If that sums up your reaction to the Federal Reserve's latest policy statement, you have plenty of company.

Wall Street sign
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Wall Street sign

The Fed's FOMC statement Tuesday managed to disappoint, confuse and surprise more than a few Wall Street analysts.

"It's being inconsistent, not transparent and not truthful," said FAO Economics chief economist Robert Brusca. "What's really going on here?"

Depending on whom you asked, the central bank either said too much, too little or said it poorly in the follow-up statement to its August release when the FOMC got Wall Street's attention by saying it would buy more long-term Treasurys to support a languid economic recovery.

"They have to do a better job of communicating," said Wells Fargo senior economist Scott Anderson. "The markets abhor the vacuum of uncertainty around QE2," he added, referring to the cute market acronym for a second stage of quantitative easing, which the Fed opened the door to a month ago.

"The market wanted to hear more," added longtime Fed watcher David Jones, of DMJ Advisors. "The market jumped to the conclusion the Fed was going to do another massive quantitative easing."

In that context, if the August statement was a success, the September is a failure.

Many in the markets wanted to hear what the Fed is considering, never mind preparing.

"They have to get out and start making some speeches about what this thing might look like," said Anderson, who is convinced the Fed is on the verge of easing.

Though the August and September statements are largely similar, the Fed's sudden focus on inflation was surprising, perhaps even baffling.

"Why is the Fed suddenly telling us inflation is inconsistent with its mandate," said Brusca. "It doesn't talk about any change in its forecast. Why now? What's happened? What's changed? The inflationary numbers haven't done anything flaky."

In fact, closely-watched inflationary gauges have been less worrisome over the past month than in previous ones, with the consumer price index hovering around an annual rate of 1 percent.

"he Fed is "being inconsistent, not transparent and not truthful. What's really going on here?" -FAO Economic chief economist, Robert Brusca

"I don't see the deflation risks that they do, and the economy may be picking up here," said Chris Rupkey of Bank of Tokyo-Mitsubishi.

Confusion aside, the lengthy attention to inflation in the second paragraph of the FOMC statement, had an ominous tone to both Brusca and Anderson, fueling speculation about what the Fed is up to.

"It's a signal that they are serious contemplating doing more about quantitative easing," said Anderson.

"They are shifting," said Brusca. "It's not just about growth—it's about inflation."

For some, the lack of details about further easing and the simultaneous fixation on inflation, really disinflation, relates to the long-running debate between hawks and doves on the committee.

The Federal Reserve headquarters in Washington, DC.
The Federal Reserve headquarters in Washington, DC.

"The reason the Fed didn’t reveal more is because they haven't come to a decision about what to do among themselves."

Brusca suspected the statement served internal purposes, essentially reflecting an agreement that more easing would be appropriate if disinflation became more of a concern, even if other gauges were showing economic growth.

"I do see the potential for an inflation gauge to be the mechanism to ameliorate the dissent," he said.

That dissent may be more of an issue with the departure of Vice Chairman Donald Kohn, whose support was key to Chairman Ben Bernanke.

The FOMC's next meeting is not untilNovember 2-3, which is just as well. Not only is it after the midterm election, it's a sufficient amount of time to judge the economy's momentum.

The slowdown of a couple months ago may wind up to be similar to the soft patch Chairman Alan Greenspan kept referring to in 2004, after the central bank's last fixation with deflation.

"They were too optimistic on growth and now they are coming down to reality," said James Awad, managing director of Zephyr Management, said of the current Fed. "By talking now they may just scare the public and investors that the recovery is running out of steam. The most recent data is a touch better. They should be quiet and see how the seasonally important fourth quarter shapes up."

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