I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.
Alan Greenspan
It’s pretty amazing that even when the Fed tries to be more clear by releasing their meeting notes, their intentions are still misinterpreted. Lehman Brother’s incomprable Jim "Fists of" Furey sent the following commentary today indicating that he read the Fed meeting notes as very bearish…
"A more aggressive Fed emerged from FOMC minutes released Tues (4/12), challenging optimism sm-caps can rise & outperform large-caps & compelling us to adopt a defensive posture & prepare for sm-cap underperformance….We are incrementally less certain the Fed will successfully navigate to a neutral policy. Previously, we felt Fed neutrality would be achieved by ’05’s summer end before vulnerable sm-caps weakened & the US & global economies softened. Fed language stating "the required amount of cumulative tightening may have increased" causes us to believe the Fed rate hikes will last longer & go higher than our prior 3.5%/summer end scenario and restriction not neutrality may be the Fed’s goal."
I came to the exact opposite conclusion about the Fed notes. I had assumed the worst after the Fed added the inflation language into their statement. However, the subsequent release of the meeting notes indicated to me that the Fed was not on autopilot but was keenly aware of the risks of a slowing economy.
Its no wonder the market has been so volatile…even when the Fed is being clear, its being interpreted in a multitude of ways.
One area to look is at how the market reacted over the past three weeks since the last rate hike. Interestingly, the Fed Funds Futures have actually come down. After the Fed raised rates, the Fed Funds Futures were predicting 4% short term rates by year end. Now, however, the futures are only expecting a year end rate of 3.8%. It’s not a dramatic difference but the directional change indicates that the market now expects one less 25 bps increase than it did earlier in the year. And that should be a slight incremental positive for equities.
Source: BullandBearwise.com