When Context Trumps Content – The FOMC's Dilemma


There has been no shortage of hype regarding Thursday’s FOMC meeting and the Committee’s potential decision to at long last raise the Federal Funds rate.  Similar to the buildup to Y2K, the Segway PT, or Super Bowls 1 – 49, it feels as though we’ve been talking about this for over a decade.  Like the weary, red-eyed couple engaged in a late night argument, every possible point and transgression has been analyzed, examined, and whitewashed to the point where we don’t know what we think or what we are saying anymore.

From the IMF to the World Bank, each has a convincing, well-telegraphed opinion on what the FOMC ought to do.  Honestly, it makes me numb but brings to mind a sharp reminder that within our new financial ecosystem, context trumps content.  More than ever, beauty, status, persuasion, proximity, relevance, and app-enabled accessibility are coming to mean more than the content itself.  Partly the reason why the Fed has lately acquired the reputation for keeping expectations and intentions too jumbled for too long.

With all the harried focus on the details of what the Fed is going to do – symptomatic of most financial media reporting – what’s truly central to this is what we should think about the Fed’s overall intention.  It’s at best unhealthy to digest material obsessing over whether the Fed hikes or doesn’t for in a general sense, it truly does not matter!

What counts and what will potentially be responsible for altering your investments, is the Fed’s take-home communication to the market – of the market.  Whether the information of rate hiking or not, coupled with their communication will soften conditions or tighten them further is the only real question we should all be asking.

The market is pricing a September 25 basis point rate hike at 30% and a 60% chance by December.  Hike or not, the bigger surprise would be a Fed that failed to wrap any decision with severely dovish overtones.  Consensus seems to think the Fed will ‘grease the skids’ by highlighting its gradualist mantra and admitting to a lower long-term rate environment than first planned.  How the market will today respond is random guess work of the highest order.

Conventional wisdom suggests if market prices are truly the net result of all collected information, then by extension, the prospect of any less accommodative monetary policy (i.e. raising rates) would eventually be led by tighter financial conditions.  Except that too often, context trumps the content.  We live in strange times.  Times where our economy wanders on a 2.0% growth trajectory for years yet, people are completely blindsided by the audacity and fury of a stock correction!  Times where cheap food and cheap gas aren’t considered economic virtues. Times where we unabashedly trade derivatives on a derivative.

At the end of the day, the Fed’s decision and subsequent communication is colossal as it’s never, to this scale, been attempted before and who honestly knows how it will eventually turn out.  From a pedestrian standpoint, it’s a basic question of risk management and worst case scenario of tightening too early or too late.