By David Nelson, CFA
Investors are lining up on either side of the DMZ choosing sides in the FOMC language debate. The Fed has been giving us signals for months that a change is coming. Dallas Fed President Richard Fisher set the ball in motion in July with his Op-Ed “The Danger of Too Loose for Too Long.”
In a webcast Tuesday, the Wall Street Journal’s chief economics correspondent Jon Hilsenrath suggested that the all-important term “considerable time” would remain but somehow qualified. Investors jumped back into same stocks they just sold with many traders pointing to Jon’s article as the catalyst.
If Mr. Hilsenrath is correct and Wednesday’s meeting ends with no change in the FOMC statement, we will have lost an opportunity. The Committee needs and wants to remove the handcuffs that tie them to calendar based guidance. Both hawks and doves inside the room want to move to forward guidance that is data dependent.
Prior to Tuesday, markets had done an excellent job digesting the possibility of a change in rhetoric. Let’s get real for a moment. Even with a parade of economists reversing course in recent days now believing the Fed will change the language, the (SPX) S&P 500 traded off a whopping (1.3%) from all-time highs.
Sure, if Team Yellen removes the phrase “considerable time” there will likely be a knee jerk reaction sending the dollar higher and stocks and bonds lower. Any pull back of descent size would be met with buyers. Right now consensus seems to revolve around a June hike. I’m on record saying March believing it would come about 6 months after a change in the language.
Fed Speak is always tough to decipher. Let’s hope we get a little more clarity. If there are no changes, the very first question during the 2:30 press conference will be “Why not?” We’ll be forced to have this same conversation again next month.
