Stocks have pulled back from new all-time highs and interest rates have risen more than 100 basis points on the longer-end of the yield curve. Investors are expecting a tapering effect of the $85 billion per month in bond buying purchases which make up quantitative easing. Now the markets will get yet another look at the Federal Reserve’s opinion about when rates should be raised, when tapering will take place, and perhaps even when quantitative easing should end when the FOMC minutes are released on Wednesday around 2:00 PM from the July 31 FOMC meeting.
Much of the financial media will have everyone worked up and concerned heavily about when the tapering effect of bond buying will start, but we would urge investors to think almost like a conspiracy theorist here in the instance of evaluating the FOMC minutes. The way that the FOMC works is to release the decision on interest rates, followed by a FOMC formal statement showing the opinion of the Federal Reserve voting members about the economy and interest rates. Then “magically” you get to see more detail about “what the FOMC was really thinking” and “what it really meant to tell you” via the FOMC minutes, with a three-week lag of course.
The long and short of the matter is that this gives the Federal Reserve the time to tweak what it said in each formal statement, and a good conspiracy theorist would believe that the three-week lag should give Ben Bernanke and all the other Fed members enough time to fine tune their words so that they sound the best.
The Federal Reserve used to keep investors guessing about policy changes. It is also true that Federal Reserve bank presidents and officials are on the speaking circuit much more now, although the Fed-Speak in August has been extremely light.
Investors and/or traders still somehow manage to move the markets based upon the Fed minutes. These are now released with a three-week lag, but they used to be released with roughly a six-week lag up until 2005. Our belief is that this is just now another opportunity for traders (and the machines) to move the market as though this is really new information. Keep in mind that since the last FOMC statement and the same meeting that Wednesday’s minutes will be focused on, we have seen the following economic reports in backward order (most recent to furthest back, with the time period covered as well):
- Consumer Sentiment (UofM) for July
- Productivity and Unit Labor Costs (Q2)
- Housing Starts for July
- Consumer Price Index and Producer Price Index (July)
- Industrial production and Capacity Utilization (July)
- Weekly Jobless Claims (3-times)
- Empire State Manufacturing (August)
- Philly Fed (August)
- Business Inventories (June)
- Import & Export Prices (July)
- NFIB Small Business Optimism Index (July)
- Wholesale trade (June)
- The Fed’s Balance Sheet (August)
- Consumer Credit (June)
- Labor Department’s Job Openings and Labor Turnover, or JOLTS (June)
- International Trade (June)
- ISM Non-Manufacturing (July)
- Unemployment & Payrolls (July)
- Personal Income & Spending (June)
- Factory Orders (June)
- Construction Spending (June)
- PMI Manufacturing Index (July)
The problem is that we are at a time where interest rates have risen yet no policy change has been made. The 10-year is set to challenge the 3% yield and the 30-year is set to challenge a 4% yield. The FOMC minutes include the complete economic analysis compiled by officials and whether any members of the FOMC have voiced opinions that deviate from the rest of the members.
We would also warn that many Federal Reserve members and Treasury officials have spoken since the July 31 official statement. Speeches have been made by James Bullard, Dennis Lockhart, Sandra Pianalto and Richard Fisher have all spoken since the July 31 statement. We would note that there would have been even more speeches had it been any other month, but Washington, D.C., and elsewhere are very quiet in August due to summer vacations.
With some 22 major economic releases in the past three weeks since the FOMC statement was released, magically the FOMC minutes are supposed to add up to where market participants can determine whether the tapering and slowing of quantitative easing measures are theoretically going to occur after the September 17-18 or October 29-30 FOMC meetings.
We would strongly ask for Janet Yellen or Larry Summers, or whomever becomes the next FOMC chairman after Ben Bernanke, to go back to either a six-week delay or to do away with the minutes entirely. If they want to really keep the minutes, why not just make their release come live with the actual FOMC results?
“I couldn’t wait to grow up to be able to finally see the clear line between black and white, only to grow up to find that there was nothing but shades of grey.” — Somebody