As expected, this week’s FOMC meeting did not provide much in the way of surprises. Nobody in their right mind was looking for rates to be increased, but traders, analysts, and economists everywhere were waiting with baited breath to see if Bernanke & Co. would provide any clues about when the so-called “exit strategy” would commence.
In years past, investors would not be terribly concerned about when the Fed was preparing to raise rates. With Fed officials uniformly assuring traders at every turn that the FOMC was planning on keeping rates at “exceptionally low levels” for “an extended period,” this would have historically created a “party on” mode for the stock market.
Yet despite the lack of any significant changes in this week’s FOMC statement and the assumption that the Fed will not hike rates in 2010, traders seem to be obsessed with the idea of the Fed’s “exit strategy.”
Blame It On the Fed
This is probably due to the fact that the investing public now believes it was the Fed’s fault that the housing bubble and the credit crisis got out of hand. Since rates were left so low for so long, the argument is that it was monetary policy that caused banks to abandon any and all lending standards and it was monetary policy that forced mortgage brokers to create something called “liar loans” where anybody, anywhere could waltz in, say they made $200K and get a piece of the American Dream. And it was obviously the tag team of Greenspan and Bernanke that forced our nation’s regulators to look the other way when Lehman and AIG started dreaming up ways to bet trillions without any risk management strategy to speak of.
So now, instead of the markets “partying like it is 1999” in response to the reality that rates will stay low for at least another year, we have everyone who has ever hit the buy button worried about whether or not the Fed will exit at the appropriate time. These folks worry that if the Fed exits too soon the economy will surely suffer. But if Bernanke & Co. waits too long, well, the general thinking is that another bubble will surely develop!
Therefore, each and every piece of economic data is being closely scrutinized in order to determine if the Fed will need to act sooner than expected – or, maybe later than expected. However, the data that has been released recently has not exactly been uniform. Some reports show the job market is improving while others show it getting slightly worse. Some data show manufacturing on the rise and others, well, not so much.
What We Learned
But we did learn something from the Fed statement this week. While the state of the jobs market is still up in the air (well, okay, we should admit that things are definitely getting less bad and are projected to improve in the coming months), the Fed DID acknowledge that the financial markets have improved dramatically. And if you will recall, it was the worry that the financial system was going to collapse that sent assets of all colors, shapes, and sizes into the tank.
Thus, from where we sit anyway, the idea that the FOMC is far less concerned about the financial markets is indeed a step in the right direction. In fact, the sentence in the FOMC statement addressing the financial markets was dropped from second place to fifth place within the opening paragraph. It also characterized financial market conditions as "more supportive of economic growth."
The Fed also confirmed that it will cease most of the special programs it created to stave off Banking Armageddon on February 1, 2010. The alphabet soup list of liquidity facilities being ended include the AMLF, CPFF, PDCF, TSLF, and the central bank liquidity swaps, which have already been winding down on their own.
Don’t look now, but what this means is Mr. Bernanke and Friends have already put their exit strategy in motion. And from here, they would appear to have a “To Do” list that will need to be implemented. And it is this “To Do” list that investors will need to watch closely next year.
Bernanke’s List
Giving credit where credit is due, Mr. Bernanke’s To Do List was not originally our idea. We’ll have to acknowledge that Mr. Joe Kalish of NDR was the first to bring the list that Ben will be checking twice (or more) this holiday season to our attention.
Ben’s To Do List: 2010
- 1. Shut Down Special Lending Facilities (Check – scheduled for February)
- 2. Stop
