US Economy, Inflation

Don’t Fear the Fed

By, 06/26/2008

Story Highlights:

  • The Federal Reserve left interest rates unchanged in yesterday's meeting.
  • The statement accompanying the decision hinted at a change in focus from downside growth risks to uncertainties regarding inflation.
  • Though headlines interpreting the statement abound, long-term investors are little affected by Fed comments, or the incremental rate hikes they might suggest.


The Federal Reserve yesterday kept its target for the federal funds rate— used as a benchmark for many types of short-term loans—unchanged at 2.0%.

Fed Leaves Rates Unchanged
By Chris Isidore,

The move, or lack thereof, was expected. It was the comments surrounding the decision, and any hint at future rate changes, that had many folks on the edge of their seat.

But then again, folks are always on the edge of their seat about this stuff. It's important not to make too much of a few comments from the Fed. When current Chairman Ben Bernanke took the reins a little over two years ago, he had visions of a more transparent Fed, one whose statements were less murky than those of the past. But his hopes were dashed early when use of the "I" word (Inflation with a capital I) was misinterpreted as a major concern. As subsequent statements were digested, and markets sent mixed signals of their own, inflation fears morphed into fears of stagflation, a growcession, even the dreaded incorrection bullbear market, as investor compasses spun from pole to pole. (We're not even totally sure what those last two are supposed to mean, but some folks out there sure seem to think they're legit. Really, it's got to be one of the last living brain cells that comes up with a term like growcession. Growth and recession simultaneously? Come on.)

But ever since some hawkish Fed comments on inflation earlier this month, the "I" word is back with a vengeance. The debate rages over inflation's current potency and whether the supposed cure (a hike in short rates)—especially given today's modest economic growth—would be worse than the disease.

Talk about putting the cart before the horse. This is classic media spin. Somewhere along the way, mild Fed inflation concern morphed into "inflation is rampant today and we need a cure now otherwise it's kaput for the already recessing economy." That would be fine, except inflation isn't rampant today and we haven't seen even a single quarter of negative economic growth yet. [Note: We think the best leading inflation indicators are long-term interest rates (see our 06/16/2008 cover story, "Global Inflation Conflagration," for more).]

Such is the danger of interpreting Fed-speak.

You can read the statement yourself and draw your own conclusions (go to, but in a nutshell: Fed comments generally pointed to easing downside concerns for economic growth and increased uncertainty regarding inflation.

So the question is: What does this mean for future Fed policy? Let's be very clear—no one knows, and it doesn't matter too much to begin with. Whether short rates are 2.0% or 2.25% or even 3% doesn't have the impact folks think it will. The fact is those are all benign, accommodative rates where capital will flow easily between banks and the public. That's what really matters. A truly big move out of accommodative territory—say upwards of 6% or 7%--would be a big deal and likely jarring to the economy, particularly if it happened very quickly.

But let's say you could game it and you knew exactly what the Fed would do. Then what? Go bearish and sell everything? Go more bullish and double down? Would a quarter or half point move truly change your global stock market outlook? We hope not.

Maybe the Fed is prepping markets for rate hikes down the road (as you probably know by now, markets hate surprises). Seems reasonable, but they could also be trying to talk down inflation without actually having to raise rates (very clever). Or maybe they're laughing their heads off right now at the grand prank they're playing on us. "Har, Har…..Good one, Ben!" "Thanks, Fred—wait ‘til you see the beauty I'm working on now!"

Despite the old adage "Don't fight the Fed," which implies stocks perform poorly during rate hikes, there have been many examples to the contrary. Stocks did great during the rate-hiking 1990s. And the last bear market is an example of stocks faring poorly as the Fed cut rates (For more on this, see our 06/11/2008 cover story, "Scrapping With Ben").

So while the prognosticators dissect the latest Fed-speak, and inflation fear-mongers vie for your attention, just relax. It doesn't pay to fear the Fed.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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