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A Fed Headfake?



June 06, 2007 – Comments (0)

I don't know that this "transparent" inflation target game is really better than when the Fed kept mum about their plans. Investors, or at the very least financial media, now have what I'd call a very unhealthy preoccupation with what the Fed is going to do. If signs point to Fed loosening, market goes up, if signs point to Fed tightening, market goes down.

Yesterday, the news was basically that the economy was still moving towards a soft landing and things were perhaps looking better than expected. "Hmmm," said Mr. Market, "that sounds to me like a potential Fed tightening down the road. Sell, sell, sell!"

I've exchanged emails with a number of folks who believe that the Fed's hawkish focus on inflation is just a red herring, when in reality it's just waiting for the appropriate time to start loosening again. While I'm not sold on this point of view yet, I have to admit that for a cut in the Fed rate to have a maximum effect it'd have to be unexpected. If it is widely anticipated that the Fed will cut rates, the markets will build that in and when the Fed finally does cut rates the effect will be minimal.

If it does turn out that the Fed has been sandbagging all along, it'll basically mean that we've gone from an opaque system, to a transparent system, to one based on lies and deception (though I'm sure some might argue that it's been based on lies and deception all along). 

All I can say is, "Come on Benny boy, don't do us like that..."


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