What the Fed Should Say
Today is Fed day. That's when we will get the latest policy announcement and economic outlook from the Federal Open Market Committee (FOMC). There are 8 of these meetings a year, and the Fed uses these meetings to decide whether to change interest rates, among other things.
FOMC have been market-moving events for a while now, as the U.S. economy has struggled.
When the Fed has good news for the markets, its job is easy. But days like today require some careful comments.
You might remember Fed Chief Bernanke's ill-advised "unusually uncertain" comment from his July Congressional testimony. Second quarter GDP growth had just slowed to 1.6% from 3.7% in the first quarter. So, yeah, things may have looked uncertain. But that doesn't mean that the Fed, who's supposed to be on top of things, should acknowledge that it is uncertain of what's going on.
It must be remembered that economics is a social science. There aren't absolute right or wrong answers. Sentiment, confidence, and belief are critical components in the economic equation.
Bernanke may be an economist. But he's also Fed Chief. He has power not only over the economy, but also sentiment. And a little bullish talk can go just as far as an interest rate cut or new Treasury buyback in giving investors confidence that there is strength in the economy.
Of course, Bernanke must acknowledge challenges or he'll be seen as out of touch. But the bottom line is that we need our leaders to be decisive, confident and in control. So let's not have any more of that "unusually uncertain" talk.
In my opinion, the best thing the Fed could do right now is nothing. Bernanke should say the economy has regained some momentum and there's no need for more stimulus this year and may not be needed at all.
Give investors some confidence, Ben. Show us you're in control.
New home construction for August made a big unexpected jump higher. That's great news, and some are even saying the housing market has found a bottom.
I'm not ready to call bottom for the housing market, though it's likely we've seen the bottom for homebuilding stocks.
Still, any positive economic data is welcome at this point.
You might have noticed that today's home construction failed to give stock prices a lift. Even the builders are down a bit.
Of course, stocks rarely move much ahead of a Fed announcement. But we also may be seeing a situation where the god news has already been priced in. The S&P 500 is up 9.6% since August 31. And there hasn't much downside to speak of since this rally began.
Investors will always take a break to ponder valuations after a nice run higher. It's called consolidation. We saw a few days of consolidation after the S&P 500 broke above 1,120. And while another 10 points may not seem like much, I suspect investors will want to take a few days and ponder the breakout above 1,130.
We still have weekly unemployment data, durable goods and leading indicators on this week's economic data calendar. Any of these could move the market, and if we are in a consolidation period, that move would be to the downside.
If you've been watching this rally from the sidelines, a dip later this week would be one to buy. 1,170 or better is still the target for this rally.
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