Another Fed Wednesday: Waiting for Nothing

This Wednesday, we have another meeting of the Federal open Market Committee (FOMC) to set monetary policy for another six weeks. Please do not sit on the edge of your seat, dear reader. I can confidently tell you that nothing important is going to happen at this meeting or the press conference to follow. The market may decide to react to nothing but that is a different matter.

How do I know this? The Fed has made it very clear it does not like surprising the market. When they did surprise the market back in the summer of 2013—the so-called Taper Tantrum—all hell broke loose. You may remember that the FOMC talking about tapering QE before the market was ready to hear it; there had not been the proper amount of pre-conditioning and the Treasury markets freaked out.

The Fed Funds Futures—a traded security that reflects the market’s collective judgment on the future of short-term interest rates—show almost no chance of any change in monetary policy in the next few weeks. So, there will be none. If the Fed intended to raise rates on Wednesday as they did last December, there would have been enough hints and leaks to drive the Futures rate higher in advance.

There are actually two components of monetary policy: actually raising or lowering rates and getting the market to expect that you will be raising or lowering rates. The later component is more important because once the market begins to expect that rates will change, the market does the work and changes the rate on its own. As often noted, the Fed follows the market.

I am reminded of an analogy about how markets work that is ascribed to Keynes. He said that the market is like a beauty contest. But the successful investors are not those who pick the prettiest girl; the winners are those who correctly guess who the other investors will pick as the prettiest girl. On Wednesday, investors expect nothing and nothing they will get.