Free Money in Temporary Abeyance
Yesterday's FOMC statement can be read in its entirety here. Just as we noted yesterday, it contained no surprises. Essentially it was a carbon copy of its predecessors, although it adopted – not unexpectedly – a somewhat more cautious tone regarding the state of the 'recovery'. And yet, in spite of there not being any surprises, the stock market initially registered its disapproval by declining. The sell-off accelerated markedly when Ben Bernanke began his post meeting press conference. A video of the press conference is available here. On Thursday, the market once again sold off, only with even more gusto at first.
SPX, daily. A strong sell-off at the open on Thursday was followed by a late day recovery after a second test of the 200 day moving average – click for higher resolution.
The SPX intraday, a 10 minute chart showing the action on Wednesday and Thursday. Initially on Thursday the sell-off that began with Ben Bernanke's press conference deepened, but late in the day a bout of short covering brought the market back to close at only a slight loss – click for higher resolution.
So what was the problem? It seems that market participants were hoping for some kind of hint that the Fed stands ready to implement yet another round of quantitative easing – in spite of the fact that it faces considerable political headwinds against the practice at the moment.
Instead, the markets were left with a 'double whammy' of bad news: firstly, the Fed acknowledged, however reluctantly, that the economy currently stinks. From the FOMC statement:
“Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected [this reveals a certain penchant for understatement, ed.] Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.”
(our emphasis)
Secondly, there was no hint that anything like 'QE 3' is imminent. In short, there is not really a good reason to be long stocks. The committee is reduced to hoping that things will somehow get better later in the year and that all the recently recorded economic weakness – which contrary to the careful tip-toe verbiage employed above has been quite substantial and widespread – will prove as 'transitory' as 'inflation' is considered to be (this is to say, 'inflation' as in rising prices – the FOMC never refers to money supply growth when it speaks of inflation).
The only reason to buy stocks in the face of a weakening economy would be – more free money. Alas, the committee decided it must stay the previously enunciated course and remain stingy for now:
“To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of 0 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”
(our emphasis)
Similar to what was already announced on occasion of the April rate setting decision, the Fed's balance sheet won't be allowed to shrink of its own accord as maturing MBS and treasuries are paid back, but rather will be held steady by reinvesting these proceeds. We may call this 'QE Lite', but it probably isn't what the stock market had (secretly) hoped for.
To top things off, Bernanke used the press conference to begin distancing himself from – Ben Bernanke! To be precise, he distanced himself somewhat from an earlier version of himself, the one that in 2000 berated the Bank of Japan for its alleged 'timidity' and 'self-induced paralysis' in terms of monetary pumping. Asked about these earlier views, Bernanke professed to now have 'more sympathy for central bankers'. As one media report on the press conference states:
“I'm a little more sympathetic to central bankers than I was 10 years ago," he said in response to a question from a Japanese journalist about Bernanke's 2000 and 2002 analyses of Japan's lost decade, while he still was an economics professor at Princeton University.”
Uh-oh. That sure sounds as though Bernanke has suddenly realized that monetary pumping cannot achieve what he formerly thought possible. This is in fact in keeping with the tone of his remarks in April. In that case, the printing press will likely remain as idle as the often bemoaned 'idle resources' in the moribund economy - at least for a while.
