FOMC Statement, Revised for Reality

The Fed’s statement was as close to sarcasm as you might ever expect to hear from that august body. Here’s the full statement:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.

Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

Of course, they can’t say what they really think. The Fed knows how important confidence is, and they do not want to do anything to discourage consumer sentiment or spook the psychology of the markets.

If they were unconcerned with those issues, the statement might look more like this:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Recent indicators have been much worse than what we were hoping for:  Housing is a bigger mess than we anticipated; Business Capex is heading south, as are durable goods.  Retail sales have been punk for 3 months running, (and what’ with those excuses from the retailers? Too hot! Too cold! Lunar eclipse!) Don’t even ask about the Automakers. We expect the economy is likely to continue to soften until it slips to about a 1.5% GDP.

Even worse, recent readings on inflation have been elevated. We were hoping that inflation pressures would moderate as the economy stabilized, but no such luck.

In these circumstances, the Committee’s predominant policy concern is that we have painted ourselves into a corner, and we are running out of options. On the one hand, Inflation remains an ongoing concern, as medical costs, food, and energy remain problematic. On the other hand, it is apparent that growth is cooling rapidly. Housing has  flipped from a net positive for consumers and job seekers to a net negative.

All told, we are running out of options until one or the other of these gets much much worse. Future policy adjustments, therefore, will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. As noted above, if GDP slips below 1.5%, we will be shifting our bias towards easing. Appreciably worse that 1.5%, and we will have to act on rates to prevent a recession — inflation be damned.

On a final note, the FOMC has taken up a collection, and as a retirement present, we are sending former Chairman Alan Greenspan to a lovely spa on Fiji Island for the foreseeable future. Since there are no satellite feeds, internet connections or any off island communications at all, the CHairman can thank us when he returns — preferably, around December 2008.

Don’t hold your breath waiting for that dose of reality . . .

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What's been said:

Discussions found on the web:
  1. Barry Ritholtz commented on Mar 21

    Changed from the January statement was “the extent and timing of any additional firming that may be needed…”

  2. js commented on Mar 21

    anyone who believes that the Fed cares about containing inflation or maintaining the value of the dollar should take a hard look at this latest statement. <5% sell off in the equity market and Ben runs off to the printing presses. My God, he is dovish than I thought (how is that possible).

  3. mark commented on Mar 21

    Headlines…Liquidity rules the day,
    Cramer is vindicated,
    Bears get fried!
    Bulls running on the Street
    of Dreams!

  4. vhehn commented on Mar 21

    any experienced trader should know that its not the news that matters. Its how the market precieves the news that is important.

  5. madlibs commented on Mar 21

    Where do I get the Fed decoder ring? Is it complementary with every pack of Bernanke brand Kool-Aid?

    I like that people bid stocks up 1.5% because a clause is eliminated, while ignoring the ominous reasons for that clause being eliminated.

  6. number2son commented on Mar 21

    The sheep are stampeding this afternoon.

  7. Mark commented on Mar 21

    Barry,

    Big fan of the blog and like you am not too optimistic about the future of the market. However, in the interest of staying balanced, can you or anyone recommend some good, analytical bullish sites? Thanks

    ~~~

    BR: Most of the major sites have a bullish bend to them — thats the long term tendency of markets.

    Specifically, RealMoney.com has been very bullish (as has all of CNBC)
    There are quite a few good traders at RM

    SchaeffersResearch.com flipped very bullish last year
    http://www.schaeffersresearch.com/

    Market Clues has also been very Bullish
    http://marketclues.blogspot.com/index.html

  8. Michael Schumacher commented on Mar 21

    Dropping the tigehtening bias was utterly farsical. I guess we can count on more money drops to continue the upward mvmt. I am using this to lighten positions…..utterly amazing that people will and do believe what they say. The rules of economics are suspended each and evry time the fed speaks and/or releases “numbers”. And yes the above comment is too true…not what it is they say…how it’s reacted to. They could say we’ve decided to raise rates and if a sizable bid was placed (gee I wonder where someone could get the type of cash to do that) in the right places (i.E. SPX fuures) then you get the right reaction.

    THis is borderline psychotic at this point..

    MS

  9. S commented on Mar 21

    The only thing certain about the economy is there’s a tidal wave of home foreclosures in the pike; inflation remains persistenly high (at least for the time being); and earnings growth is slowing.

    Obviously these are ideal conditions for buying highly valued stocks at peak margins.

  10. mark commented on Mar 21

    well I am dropping a few esm07 s here at 1445 for a longer term play. this is outrageous! the buy programs are working overtime. they ll give it back the rest of the week. Thanks for the opportunity Ben.

  11. Jay Weinstein commented on Mar 21

    Excuse me for venting, but this is the stupidest business in the world. Trillions of dollars being wagered on interpretations of “ifs” “ands” and “buts” in a worded statement.

    Even if the Fed cuts, there is no guarantee that that is good long term. I am old enough to remember NASDAQ rallying 14% in one DAY in 2001 when the Fed cut 1/2 point. We remember how that ended.

    It is just silliness.

  12. OldVet commented on Mar 21

    Yowzah, Mr. Wall Street, you sure know how to buy! Clock cleaned, I’m resetting. Fed/Big Boys 1, Little Guys 0 for the week. Good thing I saw that Cramer tape or I would have been crying big tears, but now I know it’s just business. Smackdown coming soon to a market near you, Mr. Bull.

  13. Peter commented on Mar 21

    The TIPS market is getting more nervous on inflation due to any prospect of the Fed getting dovish (even though the statement was hawkish on inflation in my opinion notwithstanding taking out the perceived bias). The implied inflation rate in the 10 yr TIPS market is at 2.416%, just shy of the highest level since mid Sept ’06 (got to 2.424% on Jan 31st). From talking and hearing from bond traders and stock traders, there is a clear difference of opinion of whether the Fed went to a neutral stance with the former thinking not and the latter, based on this rally, thinking, of course.

  14. TH commented on Mar 21

    Would second the request for analytical bullish sites. From what I’ve seen so far, the bears have logical analysis, facts, and reasoned persuasion, while the bulls have sunny smiles.

  15. tjofpa commented on Mar 21

    Great post Barry.
    I guess the ultimate irony is that just about the only NASD bulls who got gored today were the ones who bought ORCL at the open on good news!

  16. LAWMAN commented on Mar 21

    I look at two “bullish” blogs: http://investingfromtheright.blogspot.com/

    and

    http://billakanodoodahs.com/

    Note that they are not “bullish” like BR is “bearish.” Instead, they offer a different, and generally rosier, opinion of the economy. Also note that neither is particularly bullish at this moment, but, likewise, neither is in the TEOTWAWKI camp, which many commenters here like to play in.

  17. Steve C commented on Mar 21

    This afternoon the major averages have bumped up against their key resistance levels. If in the next couple of days they penetrate these current levels significantly we could be off to the races. If the major indices fall back, we’re probably in for more downside and buying opportunities.
    What am I doing? If the market continues going up, I’ll make a nice income for the year. If it falls back I’ll be able to put much more capital to work with the result that I’ll be much wealthier in about a year. I guess it’s just a waiting game for now.

  18. The Hube commented on Mar 21

    Read the statement again. It makes perfect sense.
    First: the economy seems likely to continue to expand at a moderate pace over coming quarters
    Second: inflation pressures seem likely to moderate over time
    Their conclusion: In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected
    My conclusion: As soon as they can no longer argue that the economy will continue to expand, they will no longer have any concern whatsoever about inflation and they will aggressively lower rates.

  19. phil commented on Mar 21

    The Fed’s can’t reduce interest rates overtly but they are covertly. Huh? We now live in a Bretton Woods II world where currencies are not tied to any real monetary standard. When other central banks raise their rates and strengthening their currencies, the US currency necessarily weakens. Hence, the foreign central banks are really lowering our interest rates. Bernake, Greenspan, and the rest of the Fed know this. It’s called Game Theory. So the Fed’s won’t reduce rates for fear of other countries liquidating their dollars rapidly which would upset Goldilocks, create imported inflation, increase long term interest rates wether the Fed’s like it or not, reduce corparate earnings and create a million other related but unwanted side effects in our economy and markets.

  20. Eclectic commented on Mar 21

    I like you little interpretation of the Fed statement, Barringo. I generally agree with you.

    But if you think Dr. Benber N. Anke is worried about inflation, then you haven’t taken a look at this cardiogram:

    http://tinyurl.com/2nwq7a

    It’s a good thing you didn’t take a piece of me on, or you’d be gettin’ a lot closer to diggin’ out the chicken suit and gettin’ it cleaned.

    No, Anke isn’t worried about inflation. He’s just worried about how much bait to put on the hook, and when you put that much bait on a hook, you might do one of two things that are not fun; you might catch an ass-big fish that you don’t know what to do with, or you might lose your bait.

    Riiite now, in these tender still-early stages of Anke’s career, he’s still an apprentice and I recken he don’t much want to lose his bait. No sir, he is still an apprentice baiter.

    Now… later, when he becomes a master, maybe he’ll be more willing to toss the bait.

    And you, Nouriel. I see from the last epistle until today, you musta been over to Barringo’s for a cookie and a nap, cause you got a bit more civilized, my son, but you’re still just as right as you were on the rant-to-scopic extravaganza the other day.

  21. DealBreaker.com commented on Mar 21

    The Fed Says…Something or Maybe Something Else

    Some quick and mixed reactions to todays Fed Statement. “The Fed eliminated a reference to a moderation in the housing market’s downturn and was vague enough on its future intentions to convince the assembled parties on trading floors and at…

  22. Leisa commented on Mar 21

    Did I hear that there was going to be a liquidity discussion tomorrow? That might be a pail of cold water.

  23. Ralph commented on Mar 21

    Very funny. Yet it has such a ring of truth.

    My amazement still lies with how long the general sentiment can avoid facing some of facts.

  24. Eclectic commented on Mar 21

    Mark,

    WTF planet are you on?… spin the dial my friend, and you’ll be 4-feet up a bull’s ass everywhere you turn.

    jmf,

    What’s so spectacular about the last 2 minutes? Roubini can lose his ass jiss as fast as anybody else.

  25. ac commented on Mar 21

    Time to watch the dollar. The Consumer is weakening to the housing bust(which for heaven sakes was huge, taking its time winding down as expected with that big of asset bubble), the economy has entered a growth recession this quarter IMO due to the weakening. Remember, economy weakens first, THEN the finacials take the dive in the following years(months).

    Right now, the chicken little’s don’t know that(but the mob bosses led by Bernanke sure do) so we have not got any incredible selloffs yet with equities or the dollar(though it is beginning to struggle).

    My advice thus again, is to watch the dollar in 2007. If we see a rush to the exists it could get messy drunk as reality hits the fan the US economy hasn’t grown a bit this year and probably is contracting. The desperation in March for auto-malls and retailers is starting to get on my nerves actually…………….

  26. Ironman commented on Mar 21

    Of interest, maybe: today’s non-action by the Fed puts the current probability of recession beginning sometime in the next 12 months at 49.7%. Based on recent trends, we expect that the probability will drift above the 50% mark sometime in the very near future and will float somewhere between 50-52% for a while before truly picking a direction in which to go.

    In our view, that’s really not enough to commit to a call that there will be a recession in the U.S. in the next year, but your mileage (and certainly Nouriel Roubini’s) may differ.

  27. snook commented on Mar 21

    The market will run into the end of Q1 like a ram. Then, the market will pop out of April Fools Day like a lamb chop. This sceen seems very familiar.

  28. ac commented on Mar 21

    Of interest, maybe: today’s non-action by the Fed puts the current probability of recession beginning sometime in the next 12 months at 49.7%. Based on recent trends, we expect that the probability will drift above the 50% mark sometime in the very near future and will float somewhere between 50-52% for a while before truly picking a direction in which to go.

    In our view, that’s really not enough to commit to a call that there will be a recession in the U.S. in the next year, but your mileage (and certainly Nouriel Roubini’s) may differ.

    So if the long rate moved up a full 1% that would be good for the US economy?

    I hate to spoil that party, but that formula was good when the FED had control of the longrate. Now that it has lost it this decade, that formula is now defunct as well. Typically the inversion dies when a recession is starting. So if 10 year treasuries moved from 4.52 to 5.52, a recession has started IMO. A rush to the exists. Watch for it over the next 4-8 weeks. Signs of consumer decay are everywhere. The chicken little’s don’t know this, but I do. hehe.

  29. MKS commented on Mar 21

    I don’t know who is more pathetic- the fed or the ever mindless bulls. Can’t people see- it’s these bastards who are responsible for the excesses and the financial mess we are in now. We ought to revolt and get rid of these sons of bitches with exclusive access to the printing press. After all, that’s what Milton Friedman advocated.

  30. jason commented on Mar 21

    last night reuters reported that the central bank governor of china proclaimed their central bank would no longer be accumulating foreign reserves.

    i thought this was a rather significant story – i believe china buys around $20 billion in foreign reserves (primarily dollars) monthly – yet i saw nothing on it from the mainstream press nor my favorite financial blogs.

    i know it’s a bit off-topic, but i’d love to see an analysis of what this does (or doesn’t mean)…i thought it might relate to the fed’s decision not to raise interest rates – perhaps china finally put their collective foot down at the US fed’s reckless abandon in watering down the value of dollars by cranking up the printing presses.

  31. mark commented on Mar 21

    Mark

    When everyone starts asking for bullish sites, that just may a bell ringing at the top here. hang in there buddy…

  32. Ironman commented on Mar 21

    ac,

    “So if the long rate moved up a full 1% that would be good for the US economy?

    It would mean that it would be unlikely that the U.S. would be in recession in 12 months.

    “I hate to spoil that party, but that formula was good when the FED had control of the longrate. Now that it has lost it this decade, that formula is now defunct as well.”

    The Fed has never had control of long rates. The Fed’s only real influence is over short rates.

    “Typically the inversion dies when a recession is starting. So if 10 year treasuries moved from 4.52 to 5.52, a recession has started IMO. A rush to the exists. Watch for it over the next 4-8 weeks. Signs of consumer decay are everywhere. The chicken little’s don’t know this, but I do. hehe.”

    The first part is true enough, but you’re overly focused upon the 10-Year Treasury. It would be far more likely for the 3-Month, which is more responsive to changes in the Federal Funds Rate (FFR), to do most of the changing, declining as the Fed reduces the FFR.

    Hope this helps!

  33. jagmohan swain commented on Mar 21

    IBD yeserday reported that China has come up with a State owned Investment agency that’s gonna manage the reserves.This is coming on the wake of concerns expressed by many central banks over losing value of their dollar reserves.China owns 1 trillion dollar of roughly 8 trillion dollars ( both public and private ) of total American debt.So how those reserves are managed will have large repercussion for bond market.When substantial part of treasury assets are held for political reason than profit reasons predictive power of the bond market becomes questionable.

    As far as Fed’s cutting interest rates is concerned that’s not gonna happen.These days
    Fed’s mandate is to manage Financial markets, not to protect the value of currency.So they will try their best to create smokescreens of cutting rates, raising rate.In reality they can’t do anything.Raising rates by itself isn’t the end, it’s a means to an end which is to curb credit growth and that’s not gonna happen not when housing is a problem.And cutting why cut when credit expansion has never stopped.

  34. muckdog commented on Mar 21

    “The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

    Translation: Look, we’re really just surfing the web here at the Fed Reserve. We haven’t done anything for awhile, and most of us have forgotten how to fill out the paperwork required for a rate hike or cut. Besides, we have 10gig download speed and Google hasn’t removed that copyrighted material just yet.

    Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.

    Translation: We can’t help it if losers with bad credit made risky loans, or if fly-by-night companies loaned them money. Everybody has regrets in hindsight. Welcome to the club. The economy is on auto-pilot and all we have to do is show up at a meeting every other month.

    Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

    Translation: We’re thinking if the cable company keeps raising our internet rates, we’re going to threaten them with switching to DSL unless they lower their price.

    In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”

    Translation: Carpe diem.

  35. Winston Munn commented on Mar 21

    The U.S. economy might simply be renamed the Blanche Dubois Economy: “I’ve always relied on the kindness of strangers.” The Fed has limited capacity when compared to the power to influence of the FCBs.

    The Fed is not between a rock and a hard place – they have created Gordian’s Knot.

  36. Norman commented on Mar 21

    Since the FRB hasn’t changed rates for almost nine months we can only read into their announcement that they still don’t see any reason to change. Bottomline: Nothing has changed, period.

  37. Jim commented on Mar 21

    Lots of educated shorts on this blog. I feel the pain. Time to go long.

  38. patient renter commented on Mar 21

    “Appreciably worse that 1.5%, and we will have to act on rates to prevent a recession — inflation be damned”

    Why is it that the Fed believes recession is the end of the world. How can they realistically think it can be delayed forever, while worsening all sorts of inevitable problems in the meanwhile?

  39. Eclectic commented on Mar 21

    Mark,

    WTF are you addressing comments to “Mark?”

    U R giving me a complex.

    Dean,

    Would you argue with a stop sign?

    http://tinyurl.com/2nwq7a

  40. tyoung commented on Mar 21

    What a great interview with Roubini compared with the 60 second soundbite on CNBC.

  41. MKS commented on Mar 21

    “Lots of educated shorts on this blog. I feel the pain. Time to go long.”

    mistake. We are not necesssarily short. Obviously stupid to short the US maket when the fed itself is a market maker in the buy-side.

    As educated bears, the best way to inflict pain on these bulls, and perhaps the fed, is to park your money outside of the US and gold. Time to get long, yes, collectively let’s get the hell out of here..

  42. Eclectic commented on Mar 21

    Okay, dean… I’ve reconsidered and I’ll have to give you the point.

    Cherish it my son… I don’t often do that.

    However, if you’ve read me on this blog, I’ve said that Western currencies are in a downwardly spiraling deflation in which they are in turn only playing temporary freeze-tag with each other. But, I’ll still concede you your one point.

  43. Michael Schumacher commented on Mar 21

    Sorry to be the conspiracy theorist here but all one need to do is look at the last month or so of the Fed’s own money drops.

    You wonder why the market went apeshit today??
    ANother money drop helped grease the skids. Nevermind that before the document was even released there were several large blocks traded in ALOT of stocks which to me was the brokers trying to front run each other since they all had this fresh new pile of money burning a hole in there collective pockets.

    Pretty sad……..

    I’m not a perma-bear however I want the market to go up because of fundamentally sound reasons that are wide spread and far reaching. The influence the fed has over day to day trading is just pushing out any rational economic rules that have been the cornerstone of investment (I’m not an investor, I trade and it’s getting hard to do that when the deck is already stacked against you with crooked market makers to begin with–add these payments to the dealers and it’s becoming a zero sum game) People making money who use any system are just getting lucky at this point, there is no skill involved with obvious OVERT manipulation.

    MS

    http://www.newyorkfed.org/markets/omo/dmm/temp.cfm?SHOWMORE=TRUE

  44. dgoverde commented on Mar 21

    MS,

    On that link, are we supposed to be looking at the accepted column? If so, I don’t see the big money drop. If not, then how should we be reading this information?

    Thanks,
    dgov

  45. Michael Schumacher commented on Mar 21

    So $8 billion today is not a big money drop? Ok I’ll play along here.

    Add that to the other ones of just this week and what do you get……about $26.5 BILLION in THREE DAYS. I’d say that is considerable, but these are temporary and have to be paid back….just today’s drop has a term of 6 days…just enough time to get in…baloon the market…and get out before the qtr ends. Would’nt want to show all that money on the books sitting around doing nothing would they……I’m guessing here but I beleive you won;t see any more of these dated for after the Q end.

    at an interest rate of 5.25% that’s about 3points lower than you or I get at our friendly neighborhood bank.

    MS

  46. rebound commented on Mar 21

    I don’t think this blog is bearish. It aims at market realism, be it bearish or bullish. If the fundamentals screamed buy, I believe the tone would shift 180 degrees.

    People keep referring to these so called money drops. Is this data posted some where?

  47. dgoverde commented on Mar 21

    Ah, I missed the fact that the terms vary. The greasing is more effective if you don’t have to pay the money back the very next day. But aren’t agency, treasury, and mortgage-backed repos all going to have the same effect on liquidity? If so, then this still doesn’t look like a very egregious lube job to me. Unless you can explain to me why I should ignore the 14-day term drops that occur every Thursday. They would seem to predict, under the auspices of your reasoning, that the stock market should perform really well on Thursdays, right?

  48. Michael Schumacher commented on Mar 21

    It should however that moeny does’nt necesarily get used at the time of it’s offering, if it did I think we would be well over 13k by now and we all would be shitting gold bars!!….

    I am still trying to learn about how this is done because it is’nt too clear on how it’s mechanically proferred to them…i.e. do they just go to an account that is set up in advance? or do they just take something from a pool that the fed provides…sort of a wink,wink, nudge,nudge thing take what you need.

    All I know is that it’s being done and it explains alot of the irrationality of the last 6 months. I would love to know wha the breakdown of the accepted amount is. I’m guessing that Goldman gets or takes the biggest piece.

    Just specualtion however it is becomong harder to ignore it as it is so obvious.

    MS

  49. Winston Munn commented on Mar 21

    The collective mania of the markets at the Fed’s dovish stance is truly remarkable, and to me only reinforces the positive bias inherit in the markets – which in itself is not a bad thing, as it represents a hopeful and positve nature of our people.

    However, the markets seem to discount any risk to the liquidity flow by circumstances far from the Fed’s control and certainly more menacing than a Fed hike or cut – things like the Yen carry trade that could come unwound in a heartbeat, or a reduction in dollar-held assets as China has stated it will do.

    The bottom line is that bubbles are not sustainable – something will give somewhere, sometime, and the party will end poorly. When, though, no one can say.

    Bond prices may turn out to be the canary with an attitude.

  50. Andre commented on Mar 22

    Well, whatever the Fed, the market was up big yesterday. Great day.
    If you’re short of ideas, this site got amazing breakout suggestions. Worked well for me.
    http://tradenote.blogspot.com/

  51. A Dash of Insight commented on Mar 22

    Interpreting the Fed Move

    The Fed’s Open Market Committee decided, while holding short-term rates constant, to remove the official bias toward further rate increases, while including some strong language about continuing concern about inflation. Experienced Fed observers know t…

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