As we wait for the latest minutes from the FOMC Tuesday, one analyst is telling investors to listen to the coach instead of the quarterback when it comes to interest rates.
"These Fed Presidents have never been completely comfortable with Bernanke’s extraordinary policy moves in recent years, especially the latest version of quantitative easing, and their collective nervous tick has become all the more evident with every fresh uptick in commodity prices in general and energy prices in particular."
"A player on a sports team might prefer a particular strategy, but it's the coach's opinion that matters the most," said DRW Holdings market strategist Lou Brien, in a research note. The players, in this case, are the Federal Reserve presidents who have been loud and clear of late about their desire to end the second round of quantitative easing.
"A passenger on a bus could shout out a favored detour from his seat in the back, but it's the driver who has control of the steering wheel. In my opinion the best way to fix an uncooperative computer is to hit the keyboard extra hard; the IT department has a different view," Brien said.
Fed presidents Plosser, Fisher, Hoenig, Bullard and Kocherlakota have all talked about either the need for a rate hike this year or the next, and all have expressed a desire to end extraordinary measures sooner rather than later. Brien, on the other hand, says we need to listen to the boss, Ben Bernanke.
“These Fed Presidents have never been completely comfortable with Bernanke’s extraordinary policy moves in recent years, especially the latest version of quantitative easing, and their collective nervous tick has become all the more evident with every fresh uptick in commodity prices in general and energy prices in particular,” said Brien.
The views “can hardly be considered to be outliers; they are shared by many market participants as well. But in regards to their importance for the future path of Fed policy they are decidedly opinions of the second order; the opinions that matter the most belong to Bernanke and his lieutenants Dudley and Yellen and this troika is not yet ready to assume the time is near for Fed policy to stop pulling the load.”
Bernanke and his inner circle are more worried about the labor market than inflation, according to Brien, who says even 300,000 new jobs a month being created could not be enough for Bernanke.
New York Fed boss William Dudley said last week that “Even if we were to generate growth of 300,000 jobs per month, we would still likely have considerable slack in the labor market at the end of 2012.”
Given that it took nearly three years following the recession of 1991 for the Fed to raise rates and nearly the same amount time in 2001, Brien suggests significant tightening could still be some way off.
"It might be worth noting that as of the latest employment report there are 700k fewer non-farm employees than there were in June 2004, when the last tightening cycle began."