What the Fed Does Today Matters Less Then You Think

The Federal Reserve’s liftoff day is here, and truth be told, I find almost all of the commentary on the subject to be overwrought speculation and uninformative blather. If that sounds harsh, it is. But at least it’s consistent with my other writings on this and related subjects.

You see, much of what you believe to be important isn’t important at all. Most of the media focuses on items that seem critical day-to-day, but actually amount to little more than interesting, amusing, gossipy filler.

Regardless of the import of the vast majority of what you have read about the Fed — or heard or mentioned or discussed or told your clients — most of this noise is already reflected in prices. Although many are discussing what might happen, I am telling you it already has happened.

The most regular reminder that there is too much focus on all the wrong things is the monthlyemployment situation report. As we have discussed many times (see thisthisthisthisthisthis,thisthis, and this), this is very noisy data subject to revisions and the longer trend matters much more than any single report.

I think of the Fed in a similar way.

Today is different in that for the past seven years, every single data point — and that is all each Fed meeting is, a single data point about changes in interest rates — in this series has been a big fat “nothing done.” This makes today feel more momentous than it is.

 

Continues here: Fed Increase Is the Most Important Thing Ever. Oh, Wait.

 

 

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  1. DeDude commented on Dec 16

    The most important thing from the Fed today is whether they say things that will increase or decrease expectations for where the rate will be a year from now. They have raised rates at a time when they where far below their inflation target; does that mean they abandoned that target?

    • Futuredome commented on Dec 16

      To me, that tells me they think commodities are covering it up and CPI inflation has been rising ex-commodities deflation(which is driving real wages upward). Lets note, a part of my business just got a big inflow of traffic calls after the rate hike was made. Delaying for a better deal? That is why they had to hike. It was reducing future inflation by borrowers sitting waiting for a better deal.

    • DeDude commented on Dec 16

      So are you suggesting they did this to counter a self-reinforcing deflationary spiral in commodities? I am not sure how that would work.

    • Iamthe50percent commented on Dec 17

      Yes. if one looks at the component data at the BLS web site, it’s apparent that most items like food and rent are at the inflation target, health care is much much higher. What drags the inflation rate down to zero is the double digit plunge in oil and gasoline, caused not by a poor economy but but Saudi Arabia, and Russia pumping at their maximum rate regardless of prices, obviously for cartel and/or geopolitical reasons.

  2. Concerned Neighbour commented on Dec 16

    Indeed. I saw a chart recently that indicated that Fed announcement days, and the T-1 days, account for most of the gains in the “market” since the 2009 lows. Since they now apparently see their job as to perpetually inflate asset prices, this was hardly surprising to me. And I’m not at all surprised the “markets” are rallying hard on this news. The Fed put is conveniently never, ever priced in.

    Much of the “market” is at all-time highs right now… the broader “market” would be too if it weren’t for oil tanking. No Mr. Bernanke, no bubbles to be seen anywhere.

  3. catman commented on Dec 16

    Junk and EM bonds have been going down for months. Media caught up after Icahn mentioned it. And then came the Fed. Howard Marks is too busy to come to the phone.

  4. rd commented on Dec 16

    I think the important thing about the Fed rate increase is that they did it. Now everybody can go about their normal business and hopefully pay attention to their real jobs instead of fixating on the Fed. There has been far too much ink spilled and TV airtime spent on the possibility of a very small Fed rate rise over the past 2 years. If the economy can’t handle a Fed funds rate of 0.25% to 0.5%, then people have some real work to do to fix it instead of trying to divine Janet Yellen’s intentions.

  5. willid3 commented on Dec 16

    since the Fed ate is only paid by only a very companies, it has a lot less impact than it used to. now its more of a psychological thing now. but that can actually be worse given that we humans will accept facts that support our preconceptions

  6. VennData commented on Dec 16

    Blogmaster is right.

    The Fed could change their ‘stance tomorrow” or lower it back anytime. A war could break out. Ebola. A zillion ton gold mine could be discovered under a melting ice sheet.

    Nobody knows.

  7. RW commented on Dec 16

    25 bps won’t change anything substantial or beneficial: savers won’t get more interest but banks will still raise interest on their debters; the low chance of recession means the Fed probably won’t have to back down later even though slow growth and global economic doldrums suggest there is little possibility they will raise again soon.

    The real trouble IMO is expectations at the zero bound. The economy badly wants some more inflation and since there seems to be no chance of fiscal action (as usual) the only avenue remaining is an “irresponsible” central bank and the expectations channel. That’s a second best to fiscal policy involving dollars spent on projects employing people but a precautionary rate raise from the Fed sends exactly the opposite signal regardless, “we’re so farking responsible we’ll act against the chance of inflation even though there is scant evidence action is required.”

    Policy based on an absence of credible evidence and action without a clear object, now that’ll really kick the ol’ Confidence Fairy into gear! /sarcasm

  8. Iamthe50percent commented on Dec 16

    Amazing! The Fed raised by a quarter percent and the sky didn’t fall!

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