<SPECIAL FEATURE>
August 17, 1999
Fed Schmed? Not Really
by
All the intrigue over leaks owes something to the fact that the Fed has a chummy relationship with favored reporters. These journalists attend Greenspan's annual Fourth of July party on the Fed's balcony overlooking the mall in Washington, D.C. They also trek to Jackson Hole, Wyoming, each August for an economic conference where Fed officials, corporate executives, and reporters pal around on the golf course.
James Padinha, an economist who writes a daily column for TheStreet.com, has spoofed this whole insider's world in a piece entitled "Greenspan and Me." Padinha conjured up a fantasy day of hanging out with G in Jackson Hole, chowing down at Billy's Giant Hamburgers, renting Showgirls, and chilling to the new Hole CD. Unfortunately, he didn't tell us whether G prefers Versace Courtney or grunge Courtney!
While it's safe to say that reporter Andrea Mitchell (Greenspan's wife), Berry, and even Wessel have heard more of Greenspan's sweet nothings than Padinha, the increasingly transparent Fed has actually increased the value of someone like Padinha who excels at analyzing and explaining the sheaf of obscure data Greenspan reportedly reads while regularly soaking in his tub like some modern day Marat. William Meehan, chief market analyst at Cantor Fitzgerald, admires Padinha's wit and the fact that he offers a "less biased point of view than you might get from many other economists that get paid by wire service brokerage houses."
Other pros find that the best source for the Fed is, well, the Fed itself. "Go to their website," recommends Jeff Applegate, chief investment strategist at Lehman Brothers. "Read what they're saying, read their speeches. I think that's the best source rather than reading somebody's take on what they're saying."
Fed schmed, others say. Jim Paulsen, chief investment strategist for Norwest Investment Management, calls the Fed "sexy stuff," but he thinks G is more a passenger than a driver. "Interest rates are being established by the bond market, and the Fed just follows, usually with a lag."
Maybe, but the markets still move on Fed news so traders are always looking for that special edge on G's thinking. Some bond traders key off of PIMCO guru Bill Gross both because, as Bianco says, "he has the power to make some of his forecasts self-fulfilling" and because traders think Gross has an inside track on Greenspan. PIMCO's Hague counters, "I don't think that's the case." He says traders like to know what PIMCO is doing simply so they can "get in front of the order flow," profiting from the impact PIMCO's outsized trades have on the market. Still, PIMCO was betting correctly on lower interest rates throughout 1998, even when many bond traders still feared a rate hike.
One surprise is that CNBC has become increasingly important in the Fed-watching world. First, there was the widely joked about "briefcase indicator": If G's briefcase bulges on days when the FOMC meets, a rate change is in the offing. This indicator had a world-beating 16-0 record before blowing the no-brainer call that the FOMC would stand pat on December 22, 1998. On a serious note, CNBC's Ron Insana appeared to scoop everybody on the surprise October 15, 1998 intermeeting rate cut, the one that gave investors the courage to pull back from the increasing panic and eventually rally stocks to new highs.
At midday on October 8, 1998, with the Dow down 240 points and investors fearing a freefall, Insana reported that former Fed governor Lyle Gramley, an advisor to Schwab's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCH)") else Response.Write("(NYSE: SCH)") end if %> Washington Research Group, was talking to clients about the possibility of a relatively swift Fed rate cut via an intermeeting conference call. Up to that point, no one had seriously floated such an idea, at least not publicly. Though few observers think former governors such as Gramley have a direct line to the Fed's current decision-making, Hague and others say recent veterans have an edge because they "understand the psychology" of the FOMC members.
Apparently so. A week later, the FOMC cut rates via a conference call, making Gramley's prognostication absolutely right. Yet, the market's retest of the September 1, 1998 lows actually ended with Insana's report, which sparked an afternoon recovery on October 8 that made up nearly all the morning's losses. The Dow continued to rally with the fury of Berkeley radicals of yesteryear. In less than seven weeks, G-force winds had sent the Dow soaring 25% to a new high.
As long-term investors, Fools can afford to focus on businesses and ignore most of this Fed play-by-play analysis. Still, it's easy to see why traders like to be wired into G and the posse of informed observers he attracts. A lot of the market's short-term gyrations depend greatly on what Greenspan does about interest rates -- or, at least what the more widely watched commentators surmise he will do.
Related Links:
G-Man and the Fed -- A Profile
Greenspan Call for Modest Action -- 6/17/99
Greenspan Still Sounds Optimistic -- 5/6/99