Why the Fed Said What It Said

March 26, 2007 at 2:23 pm  ·  Category: Federal Reserve, Market Commentary

” … They can’t say what they really think.  The Fed knows how important confidence is, and they do not want to do anything to discourage consumer sentiment or spook the psychology of the markets.

– Barry Ritholtz, “FOMC Statement, Revised For Reality”, Wednesday March 21, 11:53am EST

I don’t want my post from last week on the Fed’s statement to be misinterpreted.  I was explaining how the market interpreted the Fed statement and therefore why it reacted so positively to it.  I was not endorsing that interpretation and reaction.

Because, truthfully, I think it was completely ridiculous.  I don’t think the Fed’s changing it’s policy bias from “firming” to “adjustment” implies anything about the future course of their rate decisions.  And I don’t think that’s why they changed it.  They changed it because markets have been spooked lately and they wanted to assuage them

People’s behavior is determined by their perception of reality, not by the actual reality (as I’ve written about in the essay on “My Investment Philosophy”).  Because of that fact, as far as the markets are concerned (and really anything having to do with human behavior), people’s perceptions are facts.  It’s not that how people see things is how they are.  It’s that how people see things is a fact about their mental states which effects what they do which in turn effects how things are.

What we learned last week from the market’s response to the Fed statement is not that the Fed is more likely than it was before to cut rates.  What we learned is that the market trusts Ben.

Posted by Greg Feirman  ·  Trackback URL  ·  Link