Markets are always attentive to information about Fed policy, especially at potential turning points. During the week before Fed meetings and the few days afterward, there is a blackout period -- no speeches on monetary policy.
If it seems like a bombardment of Fedspeak, maybe it is because we are hearing from one of the twelve Fed Presidents or seven members of the Board of Governors. How should traders and investors interpret this news?
In this piece I look at three different summaries of a single Fed speech, and provide some insight on how the speakers themselves hope to be interpreted.
For the first approach, take a look at Barry Ritholtz's post about yesterday's speech by Janet Yellin. Then come back for two other accounts of the speech and our insight into what a news consumer should be looking for.
Link: Yellen's Yelling.
~~~ San Francisco Federal Reserve President Janet Yellen gave a speech in Idaho yesterday. You can read it at the San Francisco Federal Reserve site. I prefer Doug Kass' overview of Yellen's speech:1.Inflation most likely to move gradually lower. 2.Pause …
Laurence Meyer's excellent book, A Term at the Fed, includes a lot of information about speeches by Fed officials, and mistakes in interpreting them. In the Greenspan Fed, the Chairman advised that speeches should not move markets. There was a general adherence to the idea of discussing one's views without conveying an impression of dissension within the Fed.
Meyer wrote, "One of the most stressful events for me at the Board, then, was in having to read the wire service accounts immediately after my speeches. You had to put up with a variety of interpretations attached to a single statement, even a single sentence in a statement, what were sometimes everything but the one you intended.
Meyer went on to say that journalists did better than reporters, since they considered the message in totality.
This is exactly what happened during Yellin's speech yesterday. The wire and CNBC released little "sound bites" and traders reacted without any sense of the overall context.
The Doug Kass "summary" of Janet Yellen's speech is an excellent example of the summary by sound bite problem. Every point he makes is factually accurate, but the impression conveyed is incorrect. Here is Doug Kass's own conclusion, taken from his column on TheStreet.com:
"Federal Reserver Yellin's remarks yesterday were contrary to expectations of most market observers, and are a headwind to the fixed income markets. Despite yesterday's rally in Treasuries, bond market denizens should scurry for cover whenever a dove like Yellin turns hawkish."
Also on TheStreet.com's premium service was the assessment of Gary D. Davis:
The Fed's Yellen is speaking. Here is a summary:
1.Inflation most likely to move gradually lower.
2.Pause prudent to allow for lags.
3.Less sanguine about labor costs than month ago.
4.Must have bias towards further rate hikes.
5.Inflation remains uncomforably high.
6.Energy, low savings also risks to growth.
7.Inflation may slow faster than expected.
8.Cooling housing may damp consumer spending.
9. Need slowdown in growth underway.
10. Credibility requires we act when necessary.
I continue to believe the Fed will talk hawkish while leaving rates at current levels."
Notice that there are many of the same points, but a different emphasis and a very different conclusion. This is still the "wire service" approach that Meyer warns against.
It is also what we heard on CNBC, whose anchors summarized Yellen's "bias toward more rate hikes" statement, the same one that Kass found newsworthy.
Let's compare this with the journalistic approach of the Wall Street Journal's Greg Ip, who is looking at the speech as a whole. Ip writes:
Federal Reserve Bank of San Francisco President Janet Yellen added to that sentiment Thursday, telling an audience in Boise, Idaho, that "It appears that the current stance of policy will move inflation gradually back to the comfort zone while giving due consideration to the risks to economic activity."
Journalists look for "the lead" and Ip's idea of the main theme of the speech is far different from Kass's portrayal. Ip's story goes on to cite additional Yellen quotes supporting this interpretation:
In her speech, Ms. Yellen said inflation is still uncomfortably high and as long as it is, the Fed should have a bias toward raising rates further. "However, our past actions have already put a lot of firming in the pipeline. With the lags in policy, we haven't yet seen the full effect of our past actions. These will unfold gradually over time," she added. "By pausing, we allowed ourselves more time to observe the data and more time to gauge how much, if any, additional firming is needed to pursue our dual mandate."
Ms. Yellen argued that inflation is likely to come down in the coming year because of slower growth and flattening energy prices. In addition, she said that research at the San Francisco Fed has found that in the past decade inflation has shown a greater tendency to revert to its long-run average. That runs contrary to the conventional finding that inflation, once it rises or falls, has a strong tendency to persist at its new level.
"This evidence is important because, if it holds up, it implies that inflation may move down from its elevated level faster than many forecasters expect," Ms. Yellen said.
Since most people are not going to read the speech for themselves, they had better know where to find an accurate interpretation. At "A Dash" you can find some facts to give you perspective while most traders are reacting to the wire service sound bites.