“Most people do not listen with the intent to understand; they listen with the intent to reply.” ~ Stephen Covey
Federal Reserve (Fed) Chairman Jerome Powell has a communication problem. It must be incredibly frustrating because the problem really isn’t with anything he says; the problem is that the people he is talking to – market participants mostly – don’t actually listen.
Don’t get me wrong, the market “hears” everything. In fact, the computer programming traders create programs specifically to look for certain words: If this word is in the statement then sell stocks, but if this word then buy stocks. Believe me, the computers hear it all. But, computers, at least for now, are not capable of listening.
Back in October Powell discussed the Fed’s plan to slowly raise interest rates to get them back up to a more historically normal range. The Fed’s outlook for the economy was very strong and they felt there would be plenty of room to raise rates. The market panicked.
What the market didn’t hear was that this plan was contingent on the Fed’s rosy outlook coming to fruition. When the Fed met a few months later, the market was down and signs of economic slowing were apparent in Asia and Europe. The economy in the U.S., with which the Fed is concerned, was doing great. Powell said the Fed still saw the economy doing well and that at this point they were still on target with their plan. Unfortunately, he used the word “autopilot.” That word is what the market heard. If they had been listening they would have known that they were on “autopilot” as long as the economic data stayed positive.
The story, however, was that the Fed was tone deaf, and everyone started beating them up while the market continued to sink. Then Powell spoke at a lunch in Atlanta. He emphasized that the Fed is dependent on the current economic data. All of a sudden, the market took off. The rebound was on and the story became the Fed has completely reversed course.
Last week the minutes of the last Fed meeting came out. Economic data is still good, but the rate of growth has slowed. The Fed spoke of altering their course if the data continues to show slowing growth. The market popped on the news. Now everyone is saying the Fed has become dovish and already people are beginning to question if it has become too dovish. The pundits start talking about this word being left out of the statement, or that word being added to the statement.
The truth is the Fed is continuing to do what it has always done. Parsing words may prove that one heard everything that was said, but it doesn’t mean he listened. If our economy is strong, the Fed will raise rates in the hopes of avoiding an overheating situation. If the economy is weak, the Fed will lower rates in an effort to stimulate growth. The effectiveness of their actions is, in my opinion, not questioned enough, but their actual message has not really changed since Paul Volcker retired in 1987.
If an investor wants to know what the Fed is going to do, then look at the data – that is what they do, after all. The good news for investors is that the market no longer sees the Fed as a risk in 2019; the bad news is that they never should have to begin with. The market would have known that if it stopped being the word police and started actually listening.
Chuck Osborne, CFA