January 28, 2004
Does Greenspan No Longer Believe His Own Hype?

Sir G (paraphrased): The slumping dollar doesn’t matter, productivity gains have killed inflation, there is no housing bubble, derivatives gamblers would move offshore if I try to regulate them ,I have to keep rates low until jobs arrive…

Perhaps the Fed did it to try and support the dollar?  Or maybe the Fed got a sneak preview of a couple of scorching economic reports?  Whatever the case might be, the Fed removed the phrase ‘considerable period’ from their FOMC statement today and replaced it with the word ‘patient’. Moreover, the Fed said that, “the probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation.”

Given the Fed acknowledged that the U.S. recovery is creating a more stable pricing environment, you would think that the markets would be encouraged by today’s FOMC statement.  However, with 21 out 23 Economists (Bloomberg) expecting the Fed to keep the “considerable period” wording, the markets were shocked by the word ‘patient’ (which suggests rates may riser sooner than previously thought).  To be sure, following the FOMC Statement bonds plummeted, stocks soured, and the US dollar gained more than 1% versus the Euro in short order.  As for gold, it gapped lower, erasing almost all of today’s gains, when the NY access market opened for trade…

The argument could be made that the Fed’s bias change simply means the Fed is hedging its bet and doesn’t necessarily mean that a rate hike is likely anytime soon.  However, one has to wonder why the financial markets were not better prepared for today’s statement.  Quite frankly, usually when the Fed is about to adopt a bias switch certain insiders (Berry) are tipped off, and/or key Fed members offer rehearsed rhetoric beforehand. No such tip offs or quotes were made this go round. In fact, numerous Fed members have spent the first 3-weeks of this new-year consistently repeating that rates could remain low for some time.

*Being ‘patient’ is not really the same thing as promising to be accommodative for a ‘considerable period’ of time. As such, unless the goal of the Fed was to confuse investors they dropped the ball. 

It should be remembered that the Fed’s motives are not always transparent. Rather, and to be perfectly blunt -- lying is part of the Fed’s job. To be sure, in November 2002 the Fed blatantly lied in its statement to try and warn the financial markets that it had done all it could it do, and the Fed is probably lying today to try and serve some hidden agenda. Perhaps this agenda was sculpted by talks the Fed had with an irate bank of Japan (who told the Fed to start helping it support the dollar or fewer U.S. Treasuries would be purchased)? Or maybe the Fed’s new agenda is simply aimed at dulling some of the dangerously speculative forces in the marketplace? Whatever the case might be, the Fed removed the phrase ‘considerable period’ from their FOMC statement today and the markets were shocked.  If today’s market reaction is any indication, it could be that Greenspan and Bernanke are in for the shock when, and more important if, they have to raise rates later this year.