Fisher Investments Editorial Staff
Others

Skin and Bones

By, 09/22/2010

Story Highlights:

 

  • The FOMC maintained their monetary stance but intimated they stand ready to provide additional stimulus as conditions warrant.
  • Clearly, the FOMC didn't consider current conditions sufficiently poor to warrant a move now—a good thing.
  • More ease may be needed in the future, but with so much ease already out there—caution and consistency seem a reasonable strategy for the time being.

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Though the Fed didn't budge on monetary policy in their statement Tuesday, avid Fed watchers descended to wring meaning out of every last noun and verb nonetheless. The Fed is one of the few institutions powerful enough to move markets (both in a fleeting sense in the very, very short-term based on statements, and sometimes in the longer term if they make major errors), which is exactly why Fed statements are typically so sparse.

 

Yet, there's always a tidbit to fight over—in this case, will our central bank restart quantitative easing to support the economy? The consensus seems to think the answer is yes, the only question is when. And this view may be accurate. The Fed tends to gently telescope actions, allowing markets plenty of lead time to digest the ramifications. In this case:

 

    • The Fed removed: "…will employ its policy tools as necessary to promote economic recovery and price stability."

    • And added: "…is prepared to provide additional accommodation if needed to support the economic recovery and return inflation, over time, to levels consistent with its mandate."

 

The second statement implies action and specifically notes the direction and goal of that action (easing policy to boost inflation). But clearly Fed officials didn't consider current conditions sufficiently poor to warrant a move now—a good thing. And hedging language (like the endemic "if needed") provides plenty of leeway between now and November's meeting. If conditions worsen, they've readied markets for action. If conditions improve, well, we can all just forget this ever happened.


Further, a concerned Fed doesn't guarantee worsening conditions. The entire institution's very mandate dictates that it be concerned—they are concerned growth is too fast or too slow, or that inflation is too high or too nonexistent. It is not the Fed's job to pat itself on the back and say, "Dang! What a great job we are doing!" After a few more quarters of growth, watch for the Fed to intone cautiously about managing future inflation risks.

 

Importantly, though inflation is a little below average, it clearly signals our central bank hasn't erred with too much monetary stimulus. Or at least—that risk is still down the road a bit. And that we have inflation at all seems to indicate current policy has been mostly effective. More ease may be needed in the future, but with so much ease already out there—caution and consistency seem a reasonable strategy for the time being.

*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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