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Summary
When I wrote yesterday's missive ("Tomorrow at the FOMC, Including Its Possible Impact on Stocks"), I expressed the strong opinion that Greenspan would try to say something in the Federal Open Market Committee's post-meeting statement to help the stock market. The original statement did not succeed very well. Not to worry, though. Roll out statement number two!
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Pardon my cynicism, folks, but today's Fed "goof" was just a little too cute. I refer, of course, to the second or "corrected" statement (AKA, "Son of Statement") issued by the Federal Open Market Committee after today's policy meeting. Contained in the second press release accompanying Son of Statement was the explanation:
"Note: Corrects previous release to add sentence in second paragraph, which was dropped inadvertently." (More on the omitted sentence later.)
Has something like this ever happened before? I simply don't know. But I've been around almost 38 years in this business, and if something similar has happened before, I cannot remember it.
I point out something highly germane to this bizarre event: The "corrected" statement was released just before the stock market closed. And to see why this was important, let's quickly review how the market traded today, using the DJIA as the proxy.
Overall, the Dow had an almost 97-point range on the day, not a big deal, not considering recent volatility. How this range configured, however, is a bigger deal.
As you would expect on a day when people were anxious to see what the FOMC would do at 2:15 PM (ET), stocks did not do much of anything beforehand, trading not far from either side of unchanged heading towards the magic 2:15 PM moment. Then, out came the Federal Open Market Committee's statement, the first statement that is, indicating the FOMC had opted to raise the Federal Funds Rate by 25 basis points, to 3%.
Of course, this was the rate action that was universally anticipated, so no surprise or market disappointment -- yet.
Initially, stocks sold off, but not very much. Then, good times returned, with the DJIA reversing and going to more than a 50-point gain on the day. Then, however, another reversal, this one taking the Dow to a loss of almost 44 points.
Prices firmed a bit, then started to head seriously south. I remember looking at quotes with less than 10 minutes to go, with the DJIA down roughly 42 points, and fading. I made a trip to the post office, only to return to find that the Dow had finished the session with better than a five-point gain. Which meant almost a 50-point rally in less than 10 minutes!
I then learned why. Statement number two (Son of Statement) had been unveiled, with the key missing sentence referenced above no longer missing.
In yesterday's skeptical missive (as opposed to today's cynical one), I opined there would be an attempt by Greenspan to say something in today's post-meeting statement designed specifically to help lift stocks. Since I just wrote that piece, it is likely fresh in people's minds. If not, though, or if you did not have a chance to read it, you can do so at: "Tomorrow at the FOMC, Including Its Possible Impact on Stocks."
I believe today's original statement -- statement number one -- did contain something Uncle Al thought would help, discussed further in a moment. But it didn't. Then, mysteriously, out rolls another statement -- statement number two. As it related to the stock market, bingo!
And it helped interest rates, too. The 10-year T-Note, which had been trading pretty flat on the day, rose a couple basis points in yield after the first statement. Upon the arrival of statement number two (Son of Statement), the T-Note rallied, closing down a couple basis points in yield for the day.
Over the last few years, these post-meeting statements have shrunk significantly in size. Their substantive portions are now down to only a couple long paragraphs. Therefore, I find it difficult to fathom how a sentence that turned out to be so critical for the stock market (today, at least) was omitted from statement number one. Again, I apologize for the cynicism, but I simply cannot help it when it comes to Greenspan's Fed.
Immediately after today's rate decision and the publication of statement number one, I put out a short piece that included the following:
"There was a slight shift in the FOMC's statement, one that stock bulls will try to run with. But overall, it is a small bone the FOMC threw to the stock market, one that is not likely to sustain a major rally. Therefore, if you feel overexposed in stocks and underexposed in cash, I would sell the rally in progress as this is being written."
Little did I know how quickly this would turn out to look pretty smart. Which is exactly why I am horribly suspicions about what popped out later on from behind door number two, to use "The Price Is Right" parlance.
Before getting to a quick analysis of specific language (statements number one and two), a quick summary of today's rate action.
* The FOMC has now raised its target rate on federal funds eight times since the end of June 2004. All increases have been 25 basis points in magnitude, thereby bringing the funds rate from 1.00% to its current 3.00%.
* In addition to today's FOMC increase in the Federal Funds Rate to 3%, the Federal Reserve Board of Governors announced a quarter-point increase in the Discount Rate, from 3.75% to 4.00%.
* A 3% funds rate is now closer to the most recently reported year-over-year change in the Consumer Price Index (+3.2% as of March). However, few people I know believe the claim that the cost of living is a mere 3.2% higher than a year ago.
(Along these lines, readers might want to look at the excellent work of John Williams on the subject of why the government's contemporary rendering of inflation data isn't worth too much. See:
"Government Economic Reports: Things You've Suspected but Were Afraid to Ask!"
"Consumer Price Index"
Today's statement(s) continue to frame FOMC policy in language not materially different than in the communique coming out of the March meeting. As I assess today's installment(s), here are the key points:
"...Even after this action, the stance of monetary policy remains accommodative.
"...Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices."
The above was new to today's statement. It represents the bone I think Greenspan intended for the stock market, but one not having the desired effect.
"Labor market conditions, however, apparently continue to improve gradually."
This was a little different than the last statement. Since Greenspan probably already has Friday's employment numbers, despite the fact he is not supposed to have them, I wonder if this sentence might not be foreshadowing a decent employment report?
"Pressures on inflation have picked up in recent months and pricing power is more evident."
The above was from statement number one.
"Pressures on inflation have picked up in recent months and pricing power is more evident. Longer-term inflation expectations remain well contained."
The above was from Son of Statement, the second sentence being what was "dropped inadvertently" from statement one, according to the Fed... hmmmmmmmm.
"...The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal.
"...The committee believes that policy accommodation can be removed at a pace that is likely to be measured. ..."
Nothing really new or different in the above.
Conclusion
My reaction to statement number one was to sell the rally in stocks that immediately ensued. After factoring in Son of Statement, as well as the circumstances surrounding it, my reaction is the same, to wit:
"...Overall, it is a small bone the FOMC threw to the stock market, one that is not likely to sustain a major rally. Therefore, if you feel overexposed in stocks and underexposed in cash... sell the rally. ..."
The following table brakes out the Federal Reserve's policy decisions from today's meeting back through the beginning of 2001. In early January of 2001, the central bank began a rate-cutting initiative that took the fed funds rate go from 6.50% then, to 1.00% in late June of 2003.
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2005-2001 SCHEDULED MEETINGS OF THE FEDERAL
OPEN MARKET COMMITTEE AND POLICY ACTIONS TAKEN
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Action Taken On
Meeting --------------------------------
Date Fed Funds Rate Discount Rate
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2005
Thru May Meeting: 3.00% 4.00%
Opening '05 Levels: 2.25% 3.25%
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05/03 REGULAR MEETING, Action Taken:
+25bp to 3.00% +25bp to 4.00%
April NO SCHEDULED MEETING
03/22 REGULAR MEETING, Action Taken:
+25bp to 2.75% +25bp to 3.75%
02/01-02 REGULAR MEETING, Action Taken:
+25bp to 2.50% +25bp to 3.50%
January NO SCHEDULED MEETING ----------->
==============================================
2004
Closing '04 Levels: 2.25% 3.25%
Opening '04 Levels: 1.00% 2.00%
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Action Taken On
Meeting --------------------------------
Date Fed Funds Rate Discount Rate
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12/14 REGULAR MEETING, Action Taken:
+25bp to 2.25% +25bp to 3.25%
11/10 REGULAR MEETING, Action Taken:
+25bp to 2.00% +25bp to 3.00%
October NO SCHEDULED MEETING ------------>
09/21 REGULAR MEETING, Action Taken:
+25bp to 1.75% +25bpP to 2.75%
08/10 REGULAR MEETING, Action Taken:
+25bp to 1.50% +25bp to 2.50%
July NO SCHEDULED MEETING ------------>
06/29-30 REGULAR MEETING, Action Taken:
+25bp to 1.25% +25bp to 2.25%
05/04 REGULAR MEETING, No Action Taken
April NO SCHEDULED MEETING ------------>
03/16 REGULAR MEETING, No Action Taken
February NO SCHEDULED MEETING ------------>
01/27-28 REGULAR MEETING, No Action Taken
==============================================
2003
Closing Levels: 1.00% 2.00%*
Opening Levels: 1.25% 0.75%
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12/09 REGULAR MEETING, No Rate Action;
policy bias shifted to a neutral
stance, the first step towards
possible rate increases in 2004.
November NO SCHEDULED MEETING ------------>
10/28 REGULAR MEETING, No Action Taken
09/16 REGULAR MEETING, No Action Taken
08/12 REGULAR MEETING, No Action Taken
July NO SCHEDULED MEETING ------------>
06/24-25 REGULAR MEETING, Action Taken:
-25BP to 1.00% -25BP to 2.00%*;
policy bias left unchanged, leav-
door open to possible additional
rate cut(s).
05/06 REGULAR MEETING, No Rate Action;
policy bias shifted to favoring
possible additional rate cut(s).
April NO SCHEDULED MEETING ------------>
03/18 REGULAR MEETING, No Action Taken
February NO SCHEDULED MEETING ------------>
01/28-29 REGULAR MEETING, No Action Taken
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*Method for setting Discount
Rate changed during 2002.
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2002
Closing Levels: 1.25% 0.75%
Opening Levels: 1.75% 1.25%
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12/10 REGULAR MEETING No Action Taken
11/06 REGULAR MEETING, Action Taken:
-50BP to 1.25% -50BP to 0.75%;
policy bias shifted to "neutral."
October NO SCHEDULED MEETING ------------>
09/24 REGULAR MEETING, No Action Taken
08/13 REGULAR MEETING, No Rate Action;
policy bias shifted to favoring
possible additional rate cut(s).
July NO SCHEDULED MEETING ------------>
06/25-26 REGULAR MEETING, No Action Taken
05/07 REGULAR MEETING, No Action Taken
April NO SCHEDULED MEETING ------------>
03/19 REGULAR MEETING, No Rate Action;
policy bias shifted to "neutral"
February NO SCHEDULED MEETING ------------>
01/29-30 REGULAR MEETING, No Action Taken
==============================================
2001
Closing Levels: 1.75% 1.25%
Opening Levels: 6.50% 6.00%
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12/11 REGULAR MEETING, Action Taken:
-25BP to 1.75% -25BP to 1.25%
11/06 REGULAR MEETING, Action Taken:
-50BP to 2.00% -50BP to 1.50%
10/02 REGULAR MEETING, Action Taken:
-50BP to 2.50% -50BP to 2.00%
09/17 NO MEETING, Interim Action Taken:
-50BP to 3.00% -50BP to 2.50%
08/21 REGULAR MEETING, Action Taken:
-25BP to 3.50% -25BP to 3.00%
July NO SCHEDULED MEETING ------------>
06/26-27 REGULAR MEETING, Action Taken:
-25BP to 3.75% -25BP to 3.25%
05/15 REGULAR MEETING, Action Taken:
-50BP to 4.00% -50BP to 3.50%
04/18 NO MEETING, Interim Action Taken:
-50BP to 4.50% -50BP to 4.00%
April NO SCHEDULED MEETING ------------>
03/20 REGULAR MEETING, Action Taken:
-50BP to 5.00% -50BP to 4.50%
Feb. NO SCHEDULED MEETING ------------>
01/30-31 REGULAR MEETING, Action Taken:
-50BP to 5.50% -50BP to 5.00%
01/04 NO MEETING, Interim Action Taken:
-25BP to 5.50%
01/03 NO MEETING, Interim Action Taken:
-50BP to 6.00% -25BP to 5.75%
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