“Wanting people to listen, you can’t just tap them on the shoulder anymore. You have to hit them with a sledgehammer, and then you’ll notice you’ve got their strict attention.”
– John Doe, Seven, 1995
It’s a busy week ahead in policy circles. On Thursday, Republican leaders in the U.S. House of Representatives are planning to bring to the floor a vote on the healthcare bill. And this planned vote will come on the heels of what is sure to be headline-stealing testimony by FBI Director James Comey before the House Intelligence Committee as well as the start of Senate confirmation hearings for Supreme Court nominee Neil Gorsuch, both on Monday. And while all of these events will certainly be interesting to watch, the seven people I will be watching closely in the week ahead are those from the U.S. Federal Reserve that are scheduled to take to the speaking circuit in the coming week.
It is a jam-packed schedule for the Fed speaking tour this coming week, as the team speaks for the first time since the FOMC announced its decision to raise interest rates by 25 basis points last Wednesday.
The week opens with voting member Chicago Federal Reserve President Charles Evans taking to the airwaves with a television interview on Monday morning. He double dips later in the day with a speech at the New York National Association for Business Economics luncheon.
On Tuesday, the Fed delivers a double header of Fed speakers in the U.S., including non-voting member Kansas City Fed President Esther George speaking in Washington DC at noon, followed by voting alternate Cleveland Fed President Loretta Mester speaking in Richmond later in the day.
We get a breather on Wednesday, ahead of another triple header on Thursday. The day kicks off with the Fed Chair herself delivering a keynote address in Washington first thing in the morning. Voting member Minneapolis Fed President Neel Kashkari also takes to the podium in Washington mid-day, followed by voting member Dallas Fed President Robert Kaplan taking part in a discussion and Q&A in Chicago that evening.
The week draws to a close on Friday with Charles Evans stepping to the microphone for the third time this week in Washington, almost exactly at the same time that non-voting member St. Louis Fed President James Bullard is speaking in Memphis.
Overall, we have seven members of the U.S. Federal Reserve out speaking and likely expressing their opinions about monetary policy in ten different scheduled events in the coming week. That’s a lot of airtime that can be filled with a lot of thoughts and ideas about how the Fed is likely to proceed with monetary policy going forward.
Hawks vs. Doves
So why does it matter what the Fed has to say this upcoming week? After all, members of the U.S. Federal Reserve have become so annoyingly ubiquitous on the speaking circuit over the past many years that they may have gotten to the point where the market has largely tuned them out. The reason what the Fed decides to say this week matters because of how capital markets reacted to the Fed’s rate hike last week.
Last week’s Fed decision has been widely referred to as a “dovish” hike. Yes, the Fed decided to raise interest rates by 25 basis points for the second consecutive press conference FOMC meeting. And this decision was the culmination of a good deal of verbal heavy-lifting by the Fed over the prior three weeks leading up to the FOMC meeting where, after suddenly deciding that now was the time to raise interest rates instead of later despite little change in the economic data, a parade of Fed officials took to the microphone to effectively tell the markets a rate hike was coming in March. But once the Fed finally emerged from its meeting with the official announcement of a rate hike, it bent over backwards in dressing the decision with numerous qualifications, including downplaying the potential for any more future rate hikes than expected, along with still conservative estimates on inflation and even a dissent in the rate hike vote. By the end, the decision to hike interest rates was accompanied by so many qualifications that it ended up resulting in a net easing of financial conditions despite the fact that core interest rates were raised by a quarter of a point. Not only did the U.S. dollar (NYSEARCA:UUP) end up weakening, but risk assets, including stocks (NYSEARCA:SPY), bonds (NYSEARCA:BND), and gold (NYSEARCA:GLD), all ended up going for a ride to the upside.
In many respects, this end results raises more questions than answers.
First, if the Fed ended up with net easier monetary conditions, why then did it even bother with going out of its way to raise interest rates on Wednesday? Put more directly, it is very difficult to believe that the result of easier monetary conditions was even remotely close to what the Fed was trying to achieve by raising rates on Wednesday. Perhaps it was, and if so, the issue is then moot. But if it went to the trouble of convincing the market that it was raising rates this month, presumably it was done specifically with the intent of trying to tighten monetary conditions.
Second, if it is indeed the case that the Fed botched the messaging associated with its rate decision on Wednesday, presumably it has a good deal of work to do starting this coming week – of first trying to get the market’s attention that it misinterpreted the Fed’s intent last week, and then try to steer investor expectations to what the Fed were actually trying to achieve. This will be no small task during a week when the headlines are going to be dominated by so many other more interesting, and perhaps at times even provocative, events playing out in Washington this week. Moreover, one gets the sense that the markets have grown sick and tired of hearing from the Fed, particularly given the mixed messaging and lack of any consistent follow-through over the years anyway. In some respects, it seems like the market has largely moved on from the Fed, which will make it all the more difficult for it to revise its message, if that is indeed what the Fed needs to start to try and do in the coming week.
Time For The Sledgehammer
All of this brings things to a final key point. It has been more than eight years now since the calming of the financial crisis. Over this time, the U.S. stock market (DIA) has more than tripled and is more than half above its previous all-time highs at the same time that U.S. Treasury (TLT) yields remain near historical lows. And nearly all of this is thanks to the fact that the U.S. Federal Reserve has been so extraordinarily aggressive and easy with its monetary policy throughout the post-crisis period.
It has been true for some time now, but the time has most certainly come for the Fed to stop being so concerned about how financial markets are going to react to what it says or does at any given point in time. If the intent was to raise rates on Wednesday, it should not have done it cautiously and covered with qualifications, for in the end, the botched messaging ends up stepping all over its underlying intentions, which ends up doing more harm than good.
The Fed has repeatedly demonstrated itself as incapable of consistently getting the market to correctly receive the message it is trying to deliver. This results in subsequent backtracking and even more messaging from the Fed that the markets can end up getting even more confused and, eventually, dismissive.
As a result, the Fed would be best served to follow one of two courses going forward.
First, if it is going to hike rates, it should be decisive in the communications about it and crisp in the action. In short, put away the feather duster and bring out the sledgehammer. Stop trying to anticipate how the market is going to react and overcompensate for it, for all of the policy actions over the past eight years have left more than enough of a buffer for the markets to find itself wrong-footed for a few hours before sorting everything out. It is not the Fed’s responsibility to make sure markets are forever going higher anyway. Instead, it is to make sure that it is doing its best to promote full employment and price stability. Give the markets that, and everything else will take care of itself.
Second, if the Fed cannot figure out a way to stop repeatedly stepping on its own policy decisions with its messaging, it would be better served to simply stop talking so much. Fed policy used to be largely a mystery for financial markets, and today’s markets might benefit from having a bit more mystery. After all, I’m guessing many investors would take a few points less in price-to-earnings ratio valuation on the stock market that would come with a bit more monetary policy uncertainty if they could also forgo the repeated cycle of asset bubbles being inflated, only to be left wondering when the next round of speculative unwinding might start to get underway.
The Bottom Line
Perhaps the Fed got what it wanted last week. And if so, the slate of Fed speakers this week will be a non-event.
However, if indeed the Fed overcompensated and ended up botching the messaging associated with the rate hike last week, it is likely to begin talking assertively this upcoming week in an effort to begin righting market expectations. And given that so many headline-grabbing events will be taking place this week, the Fed may need to be repeated and direct in its language from its various speakers in the coming days in order to get the message across.
If the latter is the case, the bond market (AGG) may find itself back under pressure this week. The same would likely hold true for gold (PHYS). And while stocks (QQQ) have proven themselves to be relentlessly bulletproof to any and all potentially unsettling news, a barrage of more hawkish tones from the Fed this upcoming week would be expected to give stocks a few moments of pause, if nothing else.
Overall, it should be an interesting week ahead not only on the political front, but the monetary policy front as well.
Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.
Disclosure: I am/we are long TLT, PHYS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long selected individual stocks as part of a broadly diversified asset allocation strategy.