4 Clues the Fed Is More Dovish

U.S. stocks ended the session fat, after being up almost three-quarters of a percentage point after the release of the Federal Open Market Committee's July meeting monetary policy statement. The S&P 500 (SNPINDEX: ^GSPC  ) lost 0.01%, while the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) fell 0.14%.

Similarly, the CBOE Volatility Index (VIX) (VOLATILITYINDICES: ^VIX  ) , Wall Street's "fear index", was roughly unchanged, up six hundredths of a point, at 13.45. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

When the data changes, I change my mind
Judging by the numbers above, the Federal Reserve succeeded with regard to at least one (unofficial) mandate: "Thou shalt not roil financial markets" – a commandment it broke spectacularly at the June meeting (to be fair, that was less about the Fed and more about the market's misperception). Although the policy position and language in today's statement are essentially unchanged from then, there are a few clues to suggest the central bank has adopted a slightly more dovish stance:

  • The FOMC characterized the pace of economic activity during the first half of the year as "modest," a downgrade from the previous qualifier, "moderate."
  • The committee noted "that inflation persistently below its 2 percent objective could pose risks to economic performance," although it expects inflation to move back toward 2% "over the medium term." Inflation has been lower than 2% recently.
  • Also mentioned: the rise in mortgage rates. One of the goals behind the Fed's current quantitative easing program -- monthly purchases of $40 billion in agency mortgage-backed securities and $45 billion in longer-dated Treasuries -- is to keep mortgage rates low.
  • St. Louis Fed president James Bullard concurred with this month's policy statement after dissenting with last month's statement because he felt it didn't pay sufficient heed to the risk of low inflation (i.e., it was insufficiently dovish.)

Let me repeat that this does not indicate a shift in policy, only an acknowledgement of some recent economic data. The Fed has been careful to emphasize that the timing and speed of tapering of its bond purchase program would be determined in relation to economic data. Any recalibration by the Fed is simply a case of "when the facts change, I change my mind." At this stage, the basic facts of the economic recovery have not changed much; as such, I think investors should continue to expect that the tapering is likely to begin later this year.

While reading the tea leaves of Fed statements is crucial to traders, it is of limited value to long-term, fundamental investors. The latter are better served spending their time identifying superior businesses trading at reasonable valuations.

That's exactly how The Motley Fool's chief investment officer selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2571230, ~/Articles/ArticleHandler.aspx, 10/31/2014 5:37:57 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement