Street Signs

Does The Market Over Analyze "Fedspeak"?


At last night’s CNBC Executive Leadership Awards,guests joked that analysts and journalists alike used to guess the Fed’s interest rates decisions based on the thickness of Alan Greenspan’s briefcase when he arrived at the meetings. Yesterday, the Fed metand left rates unchanged – as expected – but nevertheless led the blue chips to a triple-digit rally. Does the market still overanalyze the Fed’s decisions and put too much weight on what is said (and not said)? On “Street Signs” two guests gave their opinions – Lou Brien, a strategist at DRW Trading Group and Steve East, chief economist at FBR.

Grading the Prof

Brien says the market got it right yesterday, and the rally didn’t have anything to do with interest rates being left unchanged. The Fed upgraded its view of the economy by sounding much more relaxed on inflation than analysts expected. And because they came out more dovish than hawkish, the market was led higher, he says, although he does believe the Fed’s statement changes yesterday were more subtle than what would typically move the markets 100+ points.

It was their generally upgraded assessment of the economy, East agrees, that led to the spike in the markets. He says it isn’t a case of over-analysis because for the Fed to publicly recognize improved inflation data, however slightly, is notable cause for a rally. What the minutes from the meeting indicate, according to East, is that inflation has tentatively moderated, and – agreeing with Brien – that was a bit more dovish than people expected.

Both analysts believe inflation is going to come down eventually. Brien thinks the inflation bias inherent in the Fed will continue and it doesn’t preclude the central bank from cutting rates if the economy begins to worsen. East says the Fed’s inflation bias will likely turn to a neutral bias for the next 3 or 4 meetings, and then he expects a rate cut in the third quarter.

So there you have it – a prediction for next fall’s Fed meeting. Indeed, the craft of interpreting “Fedspeak” will likely continue just as long as there is a Federal Reserve to analyze and a market to move.