Much Ado About Nothing

Everyone knew the Fed would hold rates steady—what folks really cared about was what the Fed said.

Story Highlights:

  • The fed funds futures market priced in a 92% chance of a rate hold, so Tuesday's announcement wasn't surprising.
  • Still, the Federal Open Market Committee (FOMC) meeting attracted much attention as folks wondered what Bernanke would say.
  • The futures market will discount the Fed's statement, helping predict what the Fed's next move will be.


Some things in life are inevitable. Like death and taxes, or perhaps Brett Favre's NFL comeback. And thanks to the Fed Funds futures market, yesterday's Fed non-move was also no great surprise.

Fed Leaves Rates Unchanged
By Chris Isidore,

According to, the futures market showed "an implied probability of 92%" that the Fed would hold rates at 2.0%. By the time the Fed's decision was announced, it was already reflected in market prices. The news was something of a non-event, with little to no power to move the market. Yet, like all FOMC meetings, yesterday's get-together was closely watched. But if we already knew what would happen, why the big hubbub?

As we explained in our past cover story, "Don't Fear the Fed," folks watch Fed meetings for two reasons: To see what the Fed does, and to hear what the Fed says. Since yesterday's rate hold was a fait accompli, the accompanying comments were the main event for investors. Why? Because stock markets are forward looking, and Fed comments (supposedly) offer hints about future action. Would "downside risks to growth" outweigh "upside risks to inflation and inflation expectations"? Would they still predict "substantial easing of monetary policy" would help promote economic growth?

Alas, Gentle Ben and his crew offered no earth-shattering insights (but then again, they really never do). You can read the full version of what they said here. We'll sum it up, in case you've mislaid your pocket Fed-speak translator: The economy grew and should keep growing, but there's a chance it won't—and inflation is higher, but not that bad and should ease up—though that's uncertain too.

In other words, not much has changed since the last meeting.

The Fed Funds futures market is efficient—it discounts all known information and settles on the outcome with the highest probability. Sure, it's not perfect, but it is historically a predictive model, and it should give us a reasonable expectation of the Fed's next move well before it takes place.

The fact remains small moves don't matter very much. The difference in 2.0% versus, say, up to 2.25% or down to 1.75% just isn't big enough to steer the vast US economy in a dramatically different direction. Just about anything in that territory is accommodative and stimulative. Instead, pay attention to the sum of Fed moves: Are they in a rate hiking cycle or not? And are rates still in accommodative territory or more restrictive? That's really all you need to know as a stock investor.

In our view, the Fed isn't likely to budge much for the rest of 2008. Keep in mind the Fed Chairmanship is a politically appointed seat. And it's an election year. That means Bernanke will probably be eager to demonstrate to the incoming president he can be accommodative in politically and economically trying times. This is an honored, if unspoken, tradition among Fed chairs of the modern era. Therefore, expect rates to stay relatively benign for the time being.

Political pandering may not be quite as inevitable as death and taxes, but it's close.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.