“Even a fool, when he keeps silent, is considered wise. When he closes his lips, he is considered prudent.”
– Proverbs 17:28
I have some free advice for Jerome Powell and the rest of the Federal Reserve board members: Shut up! Perhaps I am guilty of romanticizing my early career, but I really miss the days when the Fed just went about its business in silence. Do we really need to know every thought that crosses the minds of the various Fed members?
The market fixates on every breath as if it means something. The minutes come out and some members wanted to be more aggressive. They got out-voted – so what? The Fed did what it did, and that is really all we need to know. Besides, one cannot tell from minutes alone the seriousness of a conversation. Have market participants ever been in a meeting? In the adult world alternative points of view are often expressed so that we can think through them.
These days, every time a Fed member speaks, the financial press and short-term traders parse every single word. The market knows that inflation is the biggest economic concern; the market knows that this means interest rates will rise until inflation is under control. The market fears that the Fed (who, let’s face it, has messed up to allow inflation to take hold) will now mess up by over-correcting and putting us into a recession.
What does this mean for you? It means the market is trying to rally and come back from the correction of earlier this year, but every time we start to make serious progress, some Fed official insists on stepping in front of a microphone. The market mostly thinks that Fed members are foolish, but when they step up to the microphone and open their mouths, they remove any doubt that remained.
The greatest example of this was the taper tantrum of 2018. Fed Chair Powell gave a speech in October of 2018 suggesting that the Fed would start to taper its asset purchases. The market crashed. In a later speech he backed off on his earlier forecast, and in early 2019 the market took off like a rocket. Intelligent people will, to this day, say that the Fed “quickly changed policy” or “reversed course.”
The Fed did no such thing. Policy never changed during that time period. The only thing that changed was the tenor of Powell’s speeches. When eventually the Fed actually began to taper, it was a non-event from an equity market standpoint. What the Fed needs to do is stop thinking out loud.
But don’t we want transparency? Last night I enjoyed a sausage pizza with my kids. It was delicious. You know why it was delicious? Because we did not see the sausage being made. We need enough transparency to know that nothing unethical is going on, and no more. In other words, justify your actions after the fact, and stop telling us what you might do in the future. Stop thinking out loud.
This is not likely to happen, but perhaps the market could learn a lesson here: What all of this talk does, other than undermine Fed credibility, is create market expectations. Those expectations get reflected in Fed funds futures (contracts that predict future rates). Those futures are incredibly bad at predicting reality. According to research done by the CME group, they historically have been wrong by 75 – 175 basis points. Considering the current Fed funds rate is 33 basis points, these are huge misses.
Right now, the fear of the market is that the Fed is going to create a recession. That fear is overblown. Unemployment is currently at 3.6 percent. We are not going into a recession when 96.4 percent of workers are employed. Employment is the key statistic; as long as it holds up, we will avoid a recession, and there are currently no signs of the job market weakening. Of course anything is possible, but the probability of a recession when we have less than 4 percent unemployed is extremely low.
Currently we are at worst stuck in a market range, bouncing back and forth but going nowhere, and at best beginning to climb the wall of worry. The most recent market lows have been higher than previous lows, which is a good sign we may be moving ever so slowly up. The market is taking care of raising rates on its own, as the 10-year Treasury is approaching 3 percent. The Fed is still behind, if anything.
They could regain some credibility, perhaps even seem wise, if the Fed members would just keep quiet and do their collective job.
Warm regards,
Chuck Osborne, CFA
Managing Director
