Thursday, March 22, 2007
"Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."
It's been a while since a single sentence created that much wealth in the span of a few hours. Macro Man's email box is full of nanoanalysis on yesterday's Fed statement, with guest literature PhD's poring over each single word in agonizing detail. Macro Man finds this periodic foray into textual analysis to be nearly as tiresome as Trichet's monthly verbal striptease around the word 'vigilant.'
However, the naive, simple explanation is probably the best in this case. The statement has changed, ergo the Fed's viewpoint must have changed. By no longer suggesting that the next move on rates will necessarily be a tightening, they have therefore opened the possibility that the next move could be an easing. It's all down to the data.
In this, the Bernanke Fed has proven to be more prescient than its Greenspan predecessor, which went from a tightening bias in December 2000 to cutting rates in January 2001 without passing Go or collecting $200.
In any event, the reaction has been predictable. Liquidity is the oil that greases financial market rallies, and yesterday afternoon was no exception. However, it's probably wise to remember the outcome of a similar rally in January 2001, when the Fed actually started easing. Sure, the SPX had a super day (indicated by the arrow), but it all ended in tears.
We just may find that if (and yes, it's a big if) breakevens widen to, say, 2.65%, Helicopter Ben may land the aircraft without dispensing any largesse.