4 Clues the Fed Is More Dovish

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 lost 0.01%, while the narrower, price-weighted Dow Jones Industrial Average fell 0.14%.

Similarly, the CBOE Volatility Index (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.

The article 4 Clues the Fed Is More Dovish originally appeared on Fool.com.

Fool contributor Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Originally published