The Fed’s Show and Tell

• With so much focus on the Fed today, investors are demanding more clarity on future Fed actions.
• More information is better than less. However, we don't believe increased Fed communication will ease market volatility or assist in market forecasting.
• Talk is cheap. The focus should be on what the Fed actually does, not what they say.

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It seems Mr. Bernanke has agreed to provide more frequent and less ambiguous communication regarding the Fed's outlook. Hallelujah! The world should be much clearer now! No more market volatility, right? Not really. While we're all for more information, believing increased Fed communication will alleviate uncertainty is a pretty big stretch. The Fed can communicate until it's blue in the face, but that doesn't mean they'll have to say exactly what they plan on doing. And even if they did, it still wouldn't help investors predict market direction.

Fed to Show New Openess on Outlook
Sudeep Reddy and Greg Ip, Wall Street Journal
https://online.wsj.com/article/SB120026450118887031.html?mod=hps_us_whats_news

For fun, let's pretend the Fed can state with certainty what it plans to do next. Would this help even the shortest of short-term investors? What would one do with the information? No matter what the Fed does, the market's direction before and after is never known. Fed rate moves—up or down—don't dictate stock market direction. So the Fed can increase their communication but don't expect markets to be any easier to predict.

What about the charge the Fed has given "contradictory" statements? That can be disconcerting—the Fed says one thing one week, another thing the next. But how will speaking more often help? We may end up with more mixed messages more frequently—not what investors are looking for. We don't view that as a negative—rather, we can imagine investors simply beginning to ignore what the Fed has to say altogether if they become too chatty. And, is a Fed that sticks to its guns and never contradicts itself really a goal? If market conditions change, they should be allowed to change their views and policy and not feel hamstrung by something they said just last week.

The fact is, the Fed has a monopoly on the shortest term interest rates—they can put them where ever they want, and there's nothing we can do about it. If they're going to make a policy error, telling us well in advance isn't going to stop them from committing error! And if they reverse themselves realizing they're about to make an error—they might be attacked for being contradictory.

Ultimately the Fed's message, regardless of delivery, pales in significance to Fed action—as they say, talk is cheap. We view the risk of major policy error as low right now, so the Fed can feel free to yammer away—it won't have much long-term market impact. Maybe the real story lies in investors' constant "search for certainty." Focusing on reading Fed tea leaves distracts investors from the myriad factors having a greater impact on market direction. Of course, better (and more) information is a good thing, but understanding what matters and what doesn't can help you discern between a search for certainty and a fool's errand.