Economics: USA: Bernanke-led Fed Reserve signal 'clear as mud,' says MarketWatch

Weekly Roundup of MarketWatch's email newsletter (Mar23,2k7) underscores a semantic battle that has broken out among close monitors of Federal Reserve statements, especially now that the dean of previous FR chairmen, Alan Greenspan is officially out of the picture, and statements come from a board thru FR's present chairman Ben S. Bernanke, Federal Open Market Committee. Says MarketWatch's weekend roundup,

As expected, the Federal Reserve left official U.S. interest rates unchanged at the end of its policy-setting meeting Wednesday. While the Fed left rates alone, it tweaked the statement released with its decision [,] to suggest to some that it was giving up on future rate hikes. That interpretation drove stocks to big gains shortly after the statement was issued. By Thursday, the enthusiasm had cooled, as analysts and investors reassessed what the central bank had meant to say.

Note MR's own misleading phraseology: "released with its decision to suggest to some." Lacking commas, the sentence itself, written by some careless journalist suggests the FR statement intended its thawt to be interpreted one way by some, another way by others. Duplicity is thus inadvertantly, I presume, attributed to the FR/FOMC statement. Sloppy is closer to the truth in regard to the journalist's write-up. The Fed didn't "suggest to some." Rather, some wanted somethng more (or less) than FOMC had in its collective mind. The analysts resisted nuance, they wanted clear marching-orders type of clarity now. The Fed didn't choose to give them any. It didn't tell them whether to buy or sell, but to take a nuanced look at a changing, even sometimes volatile, economic situation.

What is the semantic quarrel now going-on among stock-market analysts and political economists? Economic Times (India) "Bernanke's policy befuddles Wall St economists" (Mar27,2k7) perhaps sums it up best:

NEW YORK: Wall Street is finding that Federal Reserve chairman Ben S Bernanke’s effort to be transparent doesn’t translate into clarity [but, again, of a certain sort-P].

Treasuries rallied on March 21 after the Fed in its latest policy statement deleted language perceived as biased toward higher interest rates. The gains proved fleeting the following day when no consensus view emerged and, instead, Wall Street’s biggest securities firms disagreed over whether the Fed will lower rates as Merrill Lynch predicted, or raise them as Bear Stearns warned its customers.

Another key analysis came earlier last week from Capitol Reports by MR's Rex Nutting, "Did the Fed change anything?--Analysis: Did Bernanke move to neutral, or just flub his communications?" (Mar21,2k7)

U.S. stock markets rallied late Wednesday after the Federal Open Market Committee released its policy statement, with [some] strategists pointing to a change in one sentence in the statement as a signal that the Fed is no longer predisposed to raising rates.

But the rally didn't hold steady over the next several days. In the meantime, another interpretation of the Bernanke / FR / FOMC gathered more strength.

And it's only a slight leap of the imagination to go from a Fed that's completely neutral about where rates are likely to go next to a Fed that's aggressively cutting rates. Nothing would please investors more than lower rates.

But did the Fed actually signal a change in its policy? Is the Fed now neutral about where interest rates are going? Opinions are "mixed," as the Fed likes to say.

Some analysts said that, in response to the weakening of the economy and specifically to the meltdown in the subprime mortgage market, the Fed had effectively removed its "bias" toward tightening monetary policy. The Fed intended to send a signal that help is on the way, and the markets rallied.

Nutting goes on to supply the obvious correction to the over-optimistic and total-neutrality interpretations, quoting Neal Soss, chief U.S. economist for Credit Suisse, then he shifts over to end-up blaming the Bernanke team for "bad communication."

"It's not a totally neutral posture," Soss continued, "It's 'bias lite' [in favour of acting foremost against inflation]."

But others say the committee flubbed its communication. In this view, FOMC is still fixated on inflation as the main risk, even as it acknowledged that risks of a severe slowdown are growing. Some members of the committee had argued in the past for a more neutral statement, one that mentioned the possibility of rate cuts as well as rate hikes, so this could just be a bone thrown to a small minority on the committee. If that's so, then the Fed got too cute in its wording, and markets misinterpreted the changes as a sign of a significant switch in policy.

"The new statement certainly marks a baby step toward the easing that so many market participants expect later this year, but we would view it as a modest concession to doves that is unlikely to mean much going forward," wrote Stephen Stanley, chief economist for RBS Greenwich Capital.

It seems to me that Bernanke and FOMC said exactly what they meant and that the analysts on both sides of the semantic quarrel are projecting onto the statement what they would like or would not like to hear.

In short, the immediately foremost problem continues to be inflation, but not such that it requires a raise in interest rates at the moment; rather, the economy is slowing down every so slowly, to the extent that raising rates would contribute to the slowly-already-occurring slowdown. To head-off that eventuality, it may be necessary soon enuff to lower interest rates and allow easier loaning. It was the cheap, easy, and unwarranted loans on mortgages by lenders all too ready to foreclose on hapless home-owners not able to meet their obligations, that made the US markets vulnerable to the Shanghai Flu. But that's another story.