EmailWhen it comes to the Federal Reserve, there is plenty to discuss. We are reminded of that every time there is an FOMC meeting and, lately, when the minutes from those meetings are released.
The business channels stack pundits in a chatter box that puts the Brady Bunch box to shame. After the anchor and the first two guests say what they say, we usually hit the mute button because we don't need to hear the other nine guests tell us what they think the meaning of the word "is" is in the Fed's commentary.
There is analysis and then there is overanalysis. The latter is a hallmark feature of Fed days. (By the way, "is" just means is in those sentences.)
With the release of the FOMC Minutes for the March 19-20 meeting last week, investors were once again forced to suffer through the overanalysis.
Don't get us wrong. It is important to analyze what the Fed is saying about tapering, or ending, its asset purchase program. Yet, there is no need to put words and thoughts into the mouths of Fed officials when it is clear what the baseline is for policy decisions.
Claritin Clear
Former Fed Chairman Alan Greenspan was a master of obfuscation, so it is understandable if Fed watchers today still struggle with any semblance of clarity out of the Federal Reserve.
The communication out of the Bernanke Fed isn't perfect, but one thing it has been Claritin clear on for a long time is that the path of policy will be dictated by incoming data.
Atlanta Fed President Lockhart, who is an FOMC participant but not a voting member this year, spoke directly to this point at the Atlanta Fed Conference last week. A Reuters report notes that Mr. Lockhart said, "A lot of focus on that [tapering or ending the asset purchase program] at the moment is maybe a bit premature. We have to wait and watch how the data come in and see how the economy evolves."
Still, the recent FOMC Minutes made it clear that a small minority of participants are arguing to end, or to taper, the asset purchase program sooner rather than later irrespective of the incoming data. To wit, the minutes said:
"A few participants noted that they already viewed the costs as likely outweighing the benefits and so would like to bring the program to a close relatively soon. A few others saw the risks as increasing fairly quickly with the size of the Federal Reserve's balance sheet and judged that the pace of purchases would likely need to be reduced before long."
Those two sentences got the overanalysis going following the release of the minutes. The chatter box resonated with references to hawks, tightening, and the meaning of the word "few" -- and then we hit the mute button.
The more salient passage in the context of what is known about the Bernanke-led Fed was this:
"Many participants emphasized that any decision to reduce the pace of purchases should reflect both an improvement in their overall outlook for labor market conditions, as implied by a wide range of available indicators, and their confidence in the sustainability of that improvement. A couple of these participants noted that if progress toward the Committee's economic goals were not maintained, the pace of purchases might appropriately be increased."
The latter is a long-winded way of saying many participants will let the data dictate the future course of action.
Fed Backing
There were 19 participants at the FOMC meeting -- the seven members of the Board of Governors and the 12 Fed bank presidents. Everyone contributed to the deliberations at the meeting, but only the seven governors and five bank presidents, who rotate each year, voted at the meeting.
The views summarized in the minutes indicate that the majority of participants aren't as unnerved at the moment by the Fed's asset purchase program as some chatter boxes would have you believe. Those participants are respectful of the risks and recognize it would be silly not to discuss them. Again, the minutes made that view clear:
"Overall, most meeting participants thought the risks and costs of additional asset purchases remained manageable, but also that continued close attention to these issues was warranted. A few participants noted that curtailing the purchase program was the most direct way to mitigate the costs and risks."
Not wanting to run the risk of overanalyzing the overanalysis, we'll refrain from introducing a number of other quotes from the FOMC Minutes backing the idea that the majority of participants continue to back the current course of monetary policy.
What It All Means
It is clear that FOMC participants are actively debating the issue of when to taper, or to end, the asset purchase program. That is not an extraordinary debate. It is a prudent debate and we could only hope that would be happening.
At the end of the day, though, the data are at the heart of that debate. The stock market seems to appreciate that fine point even though others want to get hung up on semantics.
How do we know? The stock market rose to record highs last week in the wake of a weak nonfarm payrolls report for March that certainly didn't fit the tapering parameters maintained by the FOMC's guiding triumvirate -- Fed Chairman Bernanke, Vice Chairman Dudley, and Fed Governor Yellen.
The nonfarm payrolls report, incidentally, was released two weeks after the March 19-20 FOMC meeting. Chalk one up for the recency effect as the freshness of that disappointing data overshadowed the overanalyzed language of the minutes.
The next opportunity for overanalysis will come May 1, which will mark the conclusion of the next two-day FOMC meeting.
What is known today is that the Fed is falling short of its dual mandate of maximum employment and price stability. The Fed has said as much itself because the data have indicated as much.
The debate about tapering, or ending, the asset purchase program isn't much ado about nothing. We're just a little fed up though with the silliness in dissecting the Fed's language when the Fed has made it clear that the data will speak louder than words.
