Why Yesterdays Rally Is Happening Today


Whenever the Fed says or does something that is subsequently misinterpreted, they have a few back door methods to correct the error. Two in particular were used fairly regularly. Call it the Fed edit/correction methodology.

When John Berry was at the Washington Post, he could be discretely contacted. He’s now the Fed columnist at Bloomberg, and while I’m sure he maintains his FOMC contacts, we haven’t seen him “break news” like his WaPo days. He primarily does analysis, and he is very insightful as to what the the Fed is thinking. That’s quite valuable, but its not the same as “getting the call.”

These days, that takes place with the WSJ’s Greg Ip.

With no one quoted, and no speech is cited, one has to assume this is straight from the horse’s mouth. The WSJ doesn’t print factual statements about the Fed on the front page without knowing this is precisely what they are thinking. That’s simply not how they roll.

“What Is The Fed Really Thinking?”, The Big Picture, March 27, 2007

The Federal Reserve cut interest rates Wednesday for the seventh time in eight months but signaled that one of its most aggressive rate-cutting campaigns in a generation may be nearing an end.

In a statement the Fed indicated that, although the economy remains under stress, the “substantial” rate cuts and other measures it has taken to lubricate the financial markets have reduced the risk of a severe recession. That language suggested that the Fed intends to pause in its rate-cutting while keeping the door open to more cuts if the economic outlook deteriorates.

The Fed’s decision to signal a pause….. [Bold and Italics added]

“Fed Cuts Key Rate, Signals A Pause” (subscription required), Greg Ip, The Wall Street Journal, May 1, A1

Sometimes you just have to laugh.  And the modern Federal Reserve system provides many opportunities to do just that.

Because of the power the Federal Reserve wields via its control of the money supply, a lot of money can be made by understanding their perspective.  That’s why Fed Statements are scrutinized like ancient tablets (see, for example, my “A Role For Ancient Sanskrit Scholars In Today’s Market”, Top Gun FP, March 21 2007).

Sometimes, however, the message the Fed wants to get across doesn’t.  Greenspan was notorious for his convoluted and incomprehensible remarks.  Bernanke is much more transparent, but even he fails on occasion to get the point across.

That’s where Greg Ip comes in – as Barry so nicely explained.

That’s what’s going on today as Greg Ip published a front page WSJ article titled “Fed Cuts Key Rate, Signals A Pause” (subscription required).  As I pointed out yesterday, the statement wasn’t really as hawkish as markets were expecting.  They were expecting more of a suggestion of a pause, more hawkishness on inflation, which would have led to a continued selloff in commodities and rally in the dollar and stocks.  They didn’t get the “pause signal” and so those moves reversed themselves somewhat with commodities rallying a bit and the dollar and stocks selling off (see also Bob Pisani’s excellent “Fed Statement For Traders: Blah, Blah, Blah”, Trader Talk, Wednesday April 30, 4:15pm EST).

Well, today Greg Ip is out telling us that the Fed did in fact signal a pause.  And so the rally we were supposed to have yesterday is happening today.

I wish I was joking.

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