For those that weren't around in the early 80's, it is important to recognize that parsing the Fed's verbiage is MUCH easier today than it was during the early days of Paul Volcker's rein. Although Alan Greenspan did make the game a little easier than his predecessor, recall that the thickness of the Fed Chairman's briefing pouch was itself used by analysts as an indicator of what the FOMC might do next.
Due primarily to the credit crisis and the Fed becoming the white knight that saved both the U.S. economy and the global banking system from falling into ruin in early 2009, today's Fed is pretty darn transparent about what they intend to do with monetary policy. For example, by now everyone on the planet knows that Janet Yellen's bunch will indeed move rates higher at some point in the not too distant future. The only question is when.
Enter the current game of words used by the FOMC and traders' interpretation of those words. At the conclusion of yesterday's FOMC meeting the committee issued a statement that was largely in line with prior releases. However, there were a couple of changes that seem to be attracting a lot of attention.
The “S” Words
New to this month's FOMC statement were two words beginning with the letter “s”. The first “s-word” came in the Fed's description of the labor market. So, let's compare this month's review to last month's and see if we can determine what all the fuss is about.
From the June 17 FOMC Statement:
“The pace of job gains picked up while the unemployment rate remained steady. On balance, a range of labor market indicators suggests that underutilization of labor resources diminished somewhat.”
As you can see, there were a couple of “s-words” used here: “steady” and “somewhat.” However, take a look at the verbiage on the jobs market that was released yesterday:
“The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year.”
I've bolded the key words in order to make the game easier/shorter. The key is the change in the Fed's view of job growth from “picked up” to “solid.” And then on the subject of the unemployment rate, the Fed went from “remained steady” to “declining unemployment.”
Honestly folks, this is all you need to know. The Fed has told us for what seems like eons that they want to get rates off of zero. And based on this statement, the word “solid” appears to be potentially laying groundwork for an initial increase in September.
The Second “S” Word
But before you jump to conclusions and assume that Ms. Yellen will raise rates for the first time in nearly a decade in September, there is the second “s-word” to consider.
In terms of what the Fed is looking for in order to justify beginning the “liftoff” in rates, another “s-word” was employed. In this case, the statement said that the Fed is looking for “some further improvement in the labor market.” This replaced last meeting's “further improvement.”
While the change in verbiage may appear to be subtle, to Fed-watchers, the message is clear: While the data may not be there just yet, a September rate hike is still on the table.
However, the statement also seems to suggest that the FOMC would prefer to see some additional data before making the first, largely symbolic move.
In terms of market reaction, the algos produced the usual idiotic reaction within the first five minutes of the FOMC statement's release… First the S&P 500 spiked 6 points in 2 minutes and then dove 8 over the next 3. But from there, things calmed down a bit as traders recognized that Janet Yellen is still Janet Yellen and she continues to suggest that the Fed isn't likely to do anything surprising or rash.
However, if one steps back from the blinking screens and looks at the chart of the S&P, it becomes very clear that nothing has really changed. In fact another “s-word” would seem to be appropriate as the market appears to be stuck, dead-center in the middle of the current trading range. A range that is quickly approaching the 6-month mark.
S&P 500 Index – Daily
So, will the new “s-words” continue to be meaningful to this A.D.D.-inflicted market? Only time will tell, of course. But the emergence of the new verbiage might be enough to warrant traders to check in from the beach a time or two each day during the summer vacation season.
Read More – StateoftheMarkets.com
David Moenning is Chief Investment Officer at Heritage Capital Management, a Chicago-based registered investment advisory firm. Mr. Moenning began his investment career in 1980 and formed Heritage Capital in 1989. Dave’s firm focuses on “active management” and focuses on managing market risk on a daily basis. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Mr. Moenning is the 2013-14 President of NAAIM (National Association of Active Investment Managers) an organization dedicated to active management strategies. Follow Dave on Twitter at @StateDave.