What We Know For Sure Ahead Of The Fomc
If you're in Chicago's financial district, it's almost obligatory to include a St. Patrick's Day reference on March 17, but thinking about a pot of gold just reminds me that gold is at a four-month low ahead of the FOMC meeting.
By Vikram Rangala
Tuesday, March 17, 2015 - 00:00
How about four-leaf clovers? I know people who find four-leafers all the time; I never have. One explained it to me with disarming simplicity: "People don't believe they can find four-leaf clovers. That's why they don't."
Belief is part of any successful trader's mindset: belief that the opportunity to profit is always here. Recent market fluctuations have been blamed on "jitters" about the Fed, but in fact the US stock market is up slightly on the year, with plenty of non-fairy tale reasons to believe it will go higher. The drop in gold? That's just because other investments are shinier right now.
Sure, the S&P 500 is not up like the DAX, which is up 24% as the euro slides to dollar parity. The Shanghai index is also outperforming the US, despite the slowdown in China's economy. But the U.S. is over 2200 days into a bull market that could in two months become the third-longest since 1929, according to Bloomberg.
A run like that, with all that has happened in six years, is more than luck. The last thing the Fed wants to do is mess things up. Fed Chair Yellen may omit the magic word "patience" (which replaced the old magic word "considerable time") to allow for more flexibility in making meeting-by-meeting assessments of the data at hand. However, she will likely maintain her practice, sometimes called "dovish," of reassuring the markets.
BAD NEWS, BUT BAD ENOUGH?
The Fed has identified two mandates: control inflation and promote the creation of well-paying jobs. It has identified benchmarks for each: sustained 2% inflation and job creation combined with wage growth. In last month's testimony to Congress, Yellen said, “There are perhaps hints, but we’ve not seen any significant pickup in wage growth."
Other indicators look even worse. U.S. factory output is struggling against a stronger dollar, credit-card use hit a 14-month low in January, and this week's housing starts number was disappointing, even if you factor in the freezing weather.
Not to pile on, but if you're in an "I can't find four-leaf clovers" mood, there's even more bad news to point to: February retail sales, March consumer sentiment and the Fed's industrial production report for February. Fed officials said in January they were seeing a "solid pace" of expansion. They're not likely to call the last two months "solid" enough for a rate hike now, or maybe even by June.
JANET YELLEN'S NEW NORMAL: NO PROMISES, NO DRAMA
Before the FOMC meeting, Fed officials go into a self-imposed five-day "blackout" in which they make no public remarks. In their absence, in addition to the individual analysis and punditry, there are typically some surveys of economists at major banks and funds. Bloomberg did two recently.
One survey asked when officials will drop “patient” from their statement. Almost 90 percent of economists surveyed said they'll do it tomorrow. 45 percent saw this as a signal of a June increase in rates. Thirty-seven percent said it will be in September.
In a survey last week of 66 economists, 30 said the FOMC will pull the trigger at their June 16-17 meeting. 20 said the Fed will wait until September. But the most patient were the economists from Morgan Stanley, who mostly don't see a rate hike until March 2016. It's not that they see a barren wasteland where the June predictors see a field of clovers, they just respect the Fed's ability to be patient even if they stop saying "patient."
"This is a Fed that continues to err on the side of caution and fully acknowledges the asymmetric risks to tightening policy too early when at the zero lower bound" of the Fed funds rate, they wrote in a March 11 research note. It's a bit facetious to say they are optimistic about the Fed's pessimism, but it's not far off. The Fed wants flexibility so it can do whatever it takes to keep the economy on a path of steady growth.
Psychologists sometimes gauge a person's optimism by how she reads this sequence of letters: OPPORTUNITYISNOWHERE. People who read it as "Now here" and not "nowhere" tend to be the ones who see themselves as lucky or about to be lucky. Luck is about embracing the possibilities of a particular moment.
Or of the data that you have at a particular FOMC meeting. Sometimes it's hard to find that four-leaf clover, but "lucky" traders know the value of patience—not the word "patience," but a mindset that will find profitability no matter what the Fed does.
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