Nuance’ is defined as a subtle difference in or shade of meaning, expression or sound. It’s safe to say a copy of the definition of ‘nuance’ was not distributed to members of the Federal Open Market Committee (FOMC) in advance of today’s statement release.
Yellen et al knew going into this meeting that skittish financial markets and a weakening dollar dictated that they be more careful than they’ve ever been in choosing their words carefully. And yet they opted for the verbal bull in a China shop route knowing they’re engaged in a full scale stealth currency war with the People’s Bank of China (PBOC).
Despite oil closing up on the day, stocks raced off script with the Standard & Poor’s 500 closing down 1.1 percent, giving back the bulk of yesterday’s gains. So much for that ‘stocks and oil move in perfect lockstep’ relationship that’s been firmly in place since the start of the year.
What spooked the markets is both what the Fed did and did not change in the statement’s language.
Yes, they nodded to global financial strains. Yes, the applauded the recent strong headline gains in nonfarm payrolls (though they clearly were not provided a copy of the household report which showed a whopping three percent of job gains went to those ages 25-55). The FOMC even expanded its verbiage to recognize a fresh source of weakness in the economy, as in the inventory businesses no longer see fit to build.
But we were all expecting an acknowledgment of the obvious.
Less anticipated was the adamancy of Committee members that inflation would hit their stated goal of “two percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.”
‘Strengthens further?’ Anyone bother to share the last few weekly jobless claims reports with monetary policymakers?
As for inflation’s prospects, a year and a half into crashing oil prices, the FOMC’s use of the word ‘transitory’ leads one to wonder if they are stuck in some space age time warp. Or maybe they declared it Opposite Day but failed to share that with the rest of us.
In the event interpreters harbored any doubts that a March rate hike was still on the table, this language was kept in the statement: “The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.”
While the Fed clearly remains giddily detached from reality, the bond market communicated unequivocally what it thinks about the economy’s prospects: the 10-year Treasury closed below the two percent line in the sand that’s been drawn since the start of the year.
We’ll all see on Friday how close Morgan Stanley’s dour forecast is to what’s actually reported for fourth quarter gross domestic product. The latest economic reports have led the big bank to predict economic growth slowed to a barely discernible 0.1 percent in the last three months of the year.
Clearly the folks at Morgan Stanley are looking at different data sets than the FOMC.
Of course, there are two opportunities to reshape the intent and meaning of the statement right around the corner. The first arrives February 10th when Chair Yellen will offer up her semiannual testimony to Congress. Set your DVRs now.
The second chance to massage the message comes in three weeks when the minutes of today’s meeting are released. Five years ago, as revealed in the 2008 FOMC transcripts, Yellen advised her fellow committee members to “consider using the minutes to provide quantitative information of our expectations.”
How convenient, For the FOMC, that is.
In the meantime, the Chinese will retain license to devalue the yuan to defend their economy, which whether they like it or not, still depends heavily on exports. Until the Fed makes way for the dollar to stand down, all will remain fair in word and currency wars.