Sometimes I yearn for the days of former Fed chairmen Paul Volcker and Alan Greenspan, who revealed nothing of what the Fed was thinking. Greenspan was particularly adept at befuddling even Congressional committees with his famous “fed-speak” language that left committee members and analysts asking afterwards, “Wha’d he say?”
That approach of providing no transparency helped get the economy through a lot of problems during their combined decades in office. We only found out long afterward how worried the Fed had been at various times, knowledge that no doubt would have resulted in several panics had the Fed been transparent with its concerns.
How well has it worked out having the Fed providing more transparency since 2006?
In February, 2008 in the early stage of the 2008-2009 recession, we saw Fed Chairman Bernanke and then Treasury Secretary Paulson in televised Congressional hearings on the economy and financial markets. You would think all participants would want to boost the chances of their new rescue efforts working, by providing the public with as much positive bias as possible.
But no, in the interest of full transparency, we had Bernanke warning about how the Fed expected still more negative pressure ahead from the housing collapse, worsening labor markets, a credit crunch that may have still more shoes to drop, and revealing that the Fed was also beginning to worry about the potential for rising inflation.
That was really brilliant. Spend big bucks on stimulus plans aimed at boosting public confidence that more serious problems could be averted, and then completely undermine the effort with transparency that revealed still more worries in the Fed’s thinking.
Since then the transparency has increased. The Fed’s statements after its FOMC meetings have become more revealing of the Fed’s concerns and thought processes, the actual minutes of the meetings are now released within a few weeks, and this year Chairman Bernanke has begun holding a press conference following the meetings to provide any lingering information or questions not provided in the FOMC statement.
The result has been that over the last three years markets have been forced to focus not so much on the normal driving forces of markets, the economy and earnings, but on what the Fed is worried about, what its members are thinking, what tools it is discussing that it could bring into play if needed, and what might trigger potential market-moving action.
The Fed’s action would have a better chance of producing the sustained positive market reaction the Fed is apparently after, if the Fed had simply taken the action and shut-up. Chairman Bernanke’s penchant for ‘transparency’ has caused more uncertainties than clarity over the years since adopted.
And it did so again yesterday.
The Fed ended its FOMC meeting and in its statement afterwards said it had decided to provide yet another round of QE type stimulus.
The stock market immediately reacted positively to the decision, the Dow shooting up to a gain of 81 points, other major indexes away from the blue chips up more than 1%.
But then Chairman Bernanke began his press conference and quickly destroyed the confidence boost the decision had apparently been aimed at producing, by concentrating on the negatives bothering the Fed, pointing out once again the risk of the fiscal cliff, and repeating his warning yet again that the Federal Reserve does not have the ability to shield the economy from the cliff, that it’s up to Congress.
The stock market began plunging as he spoke and gave up all its previous gains from the Fed decision to provide more stimulus, the Dow closing down 3 points.
It’s a shame that Bernanke is so attached to his brutal, off-setting transparency efforts that seem to so often sand-bag the very goals of his Fed decisions aimed at bolstering consumer and market confidence that recovery will take place.
It’s a particular shame after seeing this morning’s very encouraging economic reports which normally would provide the market with reason to build on the gains it initially took from the FOMC stimulus decision.
New weekly unemployment claims fell sharply, by 29,000 to 343,000, and the four-week moving average fell by 27,000 to 383,500, both back well under the critical 400,000 level. TheProducer Price Index plunged –0.8% in November, after a decline of 0.2% in October, indicating inflation is well under control, giving the Fed plenty of room to continue its easy money policies without creating inflation. And Retail Sales were up 0.3% in November after being down 0.3% in October.
The question becomes whether the promising looking favorable season rally will also be sand-bagged by the Chairman’s transparency of his worries, coming on top of continuing uncertainties being created by Washington in the fiscal cliff talks.
At least, we know what our technical indicators are saying about the situation.
To read my weekend newspaper column click here: Will Fiscal Cliff Defeat Market’s Favorable Seasonality-
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