Fed Obfuscation

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The market seems stuck at these levels, poised to make a move. The debate that swirls around is whether or not the Fed will hike rates. I find it a mute debate, as most of it is based on rhetoric and what they “should” do; there is little talk about the actual numbers, facts, and what the Fed “will” do. While the media debate adds confusion, the Fed certainly has not helped with their cagey language. Then a Fed President or Governor makes a speech that only adds more uncertainty. So the market waits and debates, while the odd outside economic events pound at the market; China, Greece, Middle East.


Fed Obfuscation

Fed Speak
It was Greenspan (the Fed Chair) in the 1990s that introduced the concept of “Fed Speak”. It was as if he had his own language and it was virtually impossible for anyone with certainty to know exactly what he (the Fed) was planning to do. In hindsight, whether you agree or not with his policies, it was an excellent tactic. Greenspan realized that the Federal Reserve was one, if not the most, powerful institutions in the world. The Fed’s actions and statements could send ripples around the world, could bring foreign currencies to their knees, and even create bubbles. He needed to speak with authority and confidence, without tipping his hand as to future changes of policy. This lead investors to turn to focus on the markets, fundamentals, and the forces of the Free Market – rather than becoming reliant on Fed Policy for decisions. Greenspan’s “Fed Speak” became so vague that investors started looking for other clues and they came up with the “Briefcase” indicator. They would actually look at how bulky Greenspan’s brief case was as he headed to the Hill to testify as to whether or not he was going to change monetary policy.


Courtesy of CNN.MONEY

When Bernanke took the reins he initially did his best to follow Greenspan’s footsteps. However, all that changed when the Fed became the orchestrator of the greatest economic interventionist in history. No longer did world rely on the Free Market and Trade to make investment decisions, the shift to the Fed’s intervention became the primary determining factor of capital flow and ultimately the global financial markets.


Measuring Sticks

Bernanke and the Fed were shoved into the spotlight with their massive interventionist policies (QE1, QE2, Operation Twist, QE3, TALF, SWAPS, MBS, to name a few). They needed to give banks, foreign central banks, and also Congress some measuring sticks as to when and how they would increase/decrease those massive interventionist policies. Bernanke started holding more press conferences and actually added measuring guidelines and timelines.


Courtesy of FRED

With the Fed now running the economy and printing trillions and buying trillions of assets, expanding their liabilities and balance sheet – the days of “Fed Speak” was officially over. We (banks, investors, government, foreign central banks, everyone) needed to know what was going on.

Perhaps Bernanke, now in this massive “all-in” never before experiment of interventionism thought it would be easy to set some milestones. Unemployment U3 at 6%, the CPI at 1.5%, and some other government headline data factors, combined with a very discreet time line. The market responded and made decisions on these times lines and these milestones. But when the timeline was hit and/or the milestone reached, it wasn’t over and a new or extended policy was introduced.


Data not accurate

Bernanke and economists (that did the math) realized that timelines certainly do NOT work. They also realized the Headline Data (Unemployment U3, CPI, GDP) were not an accurate reflection of the real economy. The U3 unemployment for instance does NOT represent the REAL unemployment numbers, because it only counts a certain demographic of those unemployed and ignores a large swath of unemployed. One factor was the participation rate, which shows HOW many of the unemployed we actually count in the U3 number. As the participation rate fell to decades low, millions of people that were really unemployed were not being counted in the U3. The U3 dropped because of these factors and people (millions) still didn’t have jobs. How can the Bernanke and the Fed set a milestone from a data point that is not accurately reflecting the unemployment problem.


Return to Fed Speak

When Bernanke left and Yellen took the helm at the Fed, those milestones were dropped completely from the FOMC statement. No longer does the Fed use the U3 as a measure to determine monetary policy. With huge changes to the CPI and then the GDP recently, those headline numbers as well are less reflective of the real economic conditions.
The measuring sticks and data became murkier the Fed’s only option was an attempt to return to “Fed Speak”. No longer can we measure the health of the economy from the headline data and there is no way the Fed can set policy with the headline data. Timelines didn’t work either. So today “Fed Speak” really means – “we will see”. They like to use the term “data dependent”, but they will not tell you what data or at what levels. The Fed is now looking and expanding their data set and trying to find something to give them a sense of what to do.


Courtesy of wikipedia

The Fed has put them into a difficult situation. The Fed is the largest interventionist in the world right now and the story was (when QE1 started) that it was a “temporary extraordinary emergency measure”. Now years later and several QEs latter, it is not really “temporary” and not really an “emergency”. They have removed all their milestones and timelines, so now we have NO IDEA why, when, how they will end this supposed “temporary” and “emergency” measure.

The market is married, like it or not, to the Fed’s monetary policy. The best way to think of it is that the Fed is the LARGEST market participant in the world. In the bond market, they are the largest owner of bonds. In the equity markets, they are the largest creditor for margin. How do they unwind it, when do they start, and what will be the impact? No one knows and that is what is driving uncertainty.


FED Insight

There are two documents that give us some insight to the Fed, beyond the FOMC statement. The Fed releases their “minutes” from the previous meeting. This offers a sanitized look at what was discussed at the last Fed meeting and hopefully gives us some real insight as to what concerns the Fed and what they will do. Unfortunately the “minutes” are completely sanitized, generalized, and vague. They do offer SOME insight – but far from knowing what really is going on.

Juicy Transcripts

The Fed transcripts on the other hand offer all the raw details of the Fed meetings. Unfortunately these are released YEARS later. Most recent are the 2009 transcripts and some of them read like a movie or House of Cards – well for economic wonks. Reading over the 2007 – 2009 transcripts, the Fed really had NO CLUE what was happening as it happened, how bad it would get, some even thought it was a “sub-prime” thing – initially. Many in the Fed are academics, with NO real world experience and it shows as they talk about headline numbers as if they are REAL measures.

I am thankful of the Fed Transcripts and the Freedom of Information Act, because what they say vs. what the FOMC statement and delayed minutes say are an excellent example of “controlling” the message and obfuscation.


Today’s Fed Minutes

This afternoon the Fed will release the Fed “minutes” from the July meeting at 2pm today. Even though the Fed minutes are an extremely sanitized version of the transcripts, it will give us a glimpse of what the Fed is concerned about and many believe it will give us a better glimpse as to whether the Fed will raise rates in the September meeting.

The market could react to the minutes this afternoon, if those minutes offer any clarity or if they imply a rate hike or not.

So far the Greek bailout issue, China moving the currency peg, and trade are weighing on the probability of a Fed Rate Hike – which continues to decline.

Regardless of the early session market action, I think these Fed minutes could inject some late session volatility. Watch how the market closes and listen to how the market is interpreting the Fed “minutes”.

As you know – I do NOT think they will raise rates for numerous reasons. But what I think and what they “will” eventually doesn’t matter. It is all about perception and that is what drives volatility today!


Support & Resistance

INDU 17,400
This is the support area and we could visit it today. However, watch the market reaction and interpretation to the Fed minutes.

NDX 4500
The tech heavy index is looking for support at this range and we could see some volatility today. Look at 4500 as support.

SPX 2080
On a pull-back I would look at 2080 for short-term support. Again – the Fed minutes could be a factor for the close of the day.

RUT 1200
We could see the index fall into the 1200-1210 range today, but watch the close and reaction to the Fed minutes.


We must come to terms that the markets are driven primarily by Fed policy. No doubt they are the world’s biggest market participant, both directly and indirectly. What they do, when they do it, how much they do – will drive this market higher or lower.

I don’t believe the Fed thought through how their interventionism would eventually turn them into the biggest market participant. They certainly didn’t believe it would last this long, this much, and how to unwind themselves from this massive position and intervention.

I also find it odd and fascinating that most people don’t see how deeply the market is married to this massive market participant. Brokers and Financial Advisors still talk about earnings and fundamentals as the primary driver of the market, ignoring the massive leverage margin on zero rates coupled with the ongoing billions in bond purchases by the Fed and their multi-trillion balance sheet. What do these brokers and financial advisors think when the Fed tries to unwind these positions or start raising rates (closing the door) on the margin / leverage growth?

No doubt market earnings and fundamentals are still important, but they are dwarfed by the biggest market participant, the Fed.

One Response to “Fed Obfuscation”

  1. Fred Godbout says:

    Excellent analysis bravo!