Bernanke Schools Wall Street
The Dow Jones Industrials Average fell back slightly from yesterday's all-time high on the Fed's announcement that it wouldn't change monetary policy just yet. Both the Dow and the broader S&P 500 Index slipped 0.2%.
Unsurprisingly, after yesterday's big gain, many on Wall Street are annoyed that they didn't know what the Fed would announce in advance of the announcement. The "morning after" has apparently provided an opportunity for traders to resume kibbutzing, and backseat-driving monetary policy to the national press:
Many on Wall Street were left wondering how they got it so wrong, with several pointing an accusing finger at Mr. Bernanke, the Fed chairman, and the central bank's communication strategy.
Folks, the Fed has policy meetings to determine policy. It then announces that policy in an announcement. They couldn't well tell Wall Street weeks ahead of making the policy what the policy will be, because they base those policies on new economic data. That's why the announcement telling you what was decided in the meeting comes after the meeting. All of this is pretty much implicit in the word "announcement."
Besides, what if Bernanke were to tell the public what Fed policy would be before the Fed decided on its policy so that professional traders would know what the announcement would say in advance of it being announced? Wouldn't that act make those professional traders' jobs even more superfluous than they already are?
That a few people on Wall Street apparently lost money yesterday also serves as a good reminder to investors why it makes more sense to focus on the things we can control -- picking good stocks, understanding rough trends, and avoiding emotional mistakes -- than it does to rely on short-term bets that owe success or failure to arcane events like the Fed slowing its bond-buying program in one month instead of the next.
Anyway, the Fed has previously said that, so long as inflation expectations remain in check, it'll keep up the pace of its efforts to boost the economy until "substantial improvement" in unemployment, or roughly 7%. The labor market isn't there yet:
Besides the fact that unemployment hasn't reached that threshold, and recent economic data hasn't been particularly strong, at least two other factors likely weighed into the Fed's decision to stay the course. As the statement explained:
[T]he tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.
Interest and mortgage rates spiked when the Fed had previously hinted at a shift in policy, and the Fed worries that the downside risk to the economy of tightening further is greater than the risk of not tightening yet. Also:
Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.
In other words, federal budget cuts are blunting the strength of the recovery to some extent. And, with memories of the 2011 debt-ceiling showdown that derailed the economy for several months fresh in everyone's minds, the upcoming debt-ceiling battle, which could result in a financial crisis, also might have weighed into the Fed's decision to play it safe for now.
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The article Bernanke Schools Wall Street originally appeared on Fool.com.Ilan Moscovitz has no position in any stocks mentioned. 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 may not 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.
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