The Fed's challenge: How to avoid frightening markets

The central bank will describe its plans for the next few months on Wednesday. The odds favor a bland announcement, which should cheer investors.

By Charley Blaine Jul 30, 2013 7:41PM
Ben Bernanke © Richard Drew/AP PhotoUpdated: 1:25 p.m. ET, Wednesday

It's a big day for the economy on Wednesday: A big Federal Reserve meeting, which generates lots of interest, ends in the afternoon.

The Fed announcement comes after the government this morning released its first estimate of second-quarter economic growth, which was a bit better than expected. A second report estimated the private sector created 200,000 jobs in July, also more than expected. 

The market has been a bit volatile ahead of the Fed, with a strong rally fading. At 1:25 p.m. ET, the Dow Jones industrials ($INDU) were up 15 points to 15,536 after rising 114 points to a new intraday high of 15,634. The Standard & Poor's 500 Index ($INX) was up 4 points to 1,690; the index had been up as many as 11 points. The Nasdaq Composite Index ($COMPX) had added 13 points to 3,630 after rising as many as 32 points.

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Whether the rally will be sustained after the Fed's 2 p.m. ET announcement is unclear. It is possible investors around the world will look at the statement and conclude that the bigger decisions -- on how to end its program of buying up to $85 billion a month in bonds -- are still in process.
How and when the Fed ends its bond-buying program, known mostly as quantitative easing or QE, is one of the critical moments for the central bank. Since the 2008 financial crisis, the Fed has made billions of dollars available to be lent in this country and elsewhere. The goal was first to help stabilize matters after the panic, and then to seed economic growth.

The Fed succeeded in stabilizing financial markets in 2009, but economic recovery has been slow and frustrating.

Moreover, when Fed Chairman Ben Bernanke (pictured above) started to talk about winding down the bond-buying, markets panicked. The S&P 500 dropped 5.8% between May 21 and June 24. The index is up 7.2% since.

The yield on the 10-year Treasury note rose from 1.631% to 2.725% between May 2 and July 5 before stabilizing. It climbed to as high as 2.7% early Wednesday but dropped back to 2.67%, up from 2.6% on Tuesday.

The bond yield rose on the better-than-expected report on gross domestic product and the ADP Employment Index, which noted those 200,000 private-sector jobs. Professional and business services added 49,000 jobs. Construction expanded by 22,000, the report said.

Many traders have assumed that ending QE meant the Fed would quickly start to boost interest rates, and rising rates are bad for stocks and bonds. Bernanke and other Fed officials repeatedly said in May and early June that ending bond buying does not mean the Fed plans to raise the target on its key rate, the federal funds rate. That's now at 0% to 0.25%, and the Fed does not expect to raise its until maybe 2015.

The Fed could try to communicate on Wednesday more details on the changes that are coming -- and hope it doesn't set off a second panic. Many Fed watchers believe the Fed won't say much of anything, in part because of the panic worries.

More important, the gross domestic product report is likely to show annualized growth of 2% at best in the second quarter; the economy appeared to soften during those three months.

Unless the July report of the Chicago Purchasing Managers, also due Wednesday, surprises with growth catalysts we don't see now, inflation worries will be minimized.

Plus, Bernanke isn't scheduled to hold a new conference until the September meeting, and he may want to stay reticent ahead of his expected announcement that he's leaving office.

This, then, is the conventional wisdom: The Fed statement will probably note that the economy has been growing moderately. Jobs have been expanding at a rate of 200,000 a month since 2012. It will note that household spending and business investment has been growing, too. Not at a wild pace, to be sure. The Fed doesn't see much inflation, notwithstanding the 12% increase in home prices over the last year or the 10% rise in retail gasoline prices this year.

It doesn't see much food-price inflation, either. Indeed, corn prices are down a third this year, and soybean prices have fallen nearly 15%. Wheat prices have fallen nearly 16%.

True, gasoline prices are higher, but they've been falling over the last week or so. Crude oil (-CL) has started to drift lower. Gold (-GC) may be up 8.2% in July, but gold is still down 21% for the year.

But the unemployment rate is still high at 7.6%. There are millions who can't find work or earn enough to be able to live on just one salary. So, the Fed is going to say it will continue its bond buying in its current form at least until September. If the economy shows weakness in that time, the bond buying will continue.

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163Comments
Jul 30, 2013 10:31PM
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How do you justify the assertion that the markets are stable when the slightest suggestion that the cheap money will end sends the Dow in to a 100 to 500 point correction with NASDAQ and S&P500 following along??

As for economic recovery that depends on your location, Wall St or Pennsylvania Ave, yes good recovery. Elsewhere - not so much.

Jul 30, 2013 8:23PM
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What does the Federal Reserve actually have to do with the Stock Markets? Does Kroger go out and feed the cattle the rancher will slaughter, the butcher will cut up and package for the customer? What we have here is TERRORISM. Bernanke doesn't need to worry about WHEN he steps down, just the next few minutes before he gets strung up for financial manipulation crimes. The best thing that people can do RIGHT NOW is to sell out of the markets and force them into failure. It illuminates who pulls the strings. I doubt if more than a handful or less corrupt insane maniacs call all the shots. That needs to end very sooner than anytime later.
Jul 30, 2013 8:16PM
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If the Feds think their primary Mandate is to worry about the week to week moves of the Stock Markets, then they are clearly lying about their claimed Main Mandates. That really doesn't shock anyone. Tapering is Tightening and Uncle Ben is the Worst Fed Chief of all times.
Jul 31, 2013 4:58AM
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it is pretty obvious even to a small investor,  the feds are holing up the  market trouble is  small investors are in  401 k  and can not  get out  when it  fails.  like the billionaires  and  milliners  can  so the little  man will go  down . the  rich get richer  and the  middle  class  is  gone  forever. this was the plan back when the  401k was started just one more step  towards   socialism  health care  next  then  guns  and  god 
Jul 30, 2013 9:52PM
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Just more proof that the market is being held up, literally, by the Fed.   My guess is that since Bernanke and Co. know this, they will continue to print money until he retires.  Bernanke fully understands that any announcement which includes a specific time frame on cutting off the money spigot, is going to cause an immediate and severe downturn in the markets.  Maybe even a crash.  But, just like any other politician, he wants to retire on a high note and leave the real dirty work to the next Fed Chairman.

 

Unfortunately, there is no easy way out.  There is no way to just slowly cut back.  Any hint of any type or amount of cut back is going to send trillions in the stock markets heading toward the exits.  By taking interest rates to essentially zero, the Fed has backed themselves into a corner.  When you couple that with the trillions the Fed has added to the deficit, in addition to the bond bubble, created by the Fed, even if the Fed never makes an official announcement, and just quietly starts cutting back, the news and the effects will still be the same. 

 

The stock market is at all time highs, but unfortunately, they are manipulated highs and not reflective of where the markets should really be.  This is totally the result of Bernanke and Company, and it won't take much to pop this bubble.   When it comes, the average person, who's usual total extent of managing their 401k, is to look at the balance once a month, is going to be blindsided.

 

To be fair, I may also be blindsided.  But only if that announcement comes tomorrow:  Which I don't expect it will, unless I completely have misread human nature.  Otherwise, I'll be going to guaranteed funds in the next month, and then will either transition back into stocks, or into metals related plays depending on how things unfold from there over the next couple of months.   I have other accounts where, if the set up is right, I'll be using them to short the market if that seems to be where the trend is going.   Fighting the trend is almost always a losing proposition unless you're so good that you can be on the reverse side at or near the top or bottom.

 

 I'm a good trader, but I'm not nearly so good that I'll pretend to be able to pick market tops or bottoms in a manipulated market, which is what we have now.

 

September, though it has been good for stocks the last few years, is traditionally one of the worst months. In the stock market, things always tend to revert back to their mean. 

 

 

 

Jul 30, 2013 10:29PM
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END THE FED!!!

 

Then, HANG Helicopter Ben

 

Jul 31, 2013 7:53AM
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"When there is 500pts. loss in a week, then I would take notice, but not worry.."

 

You should be preparing for much larger drops than 500 points. You should spend some time analyzing the purposely segregated articles on the status of business platforms worldwide. Being hoarded cash and an administrative team doesn't make you viable. Our exposure to B.R.I.C. attacks is enormous and they have alternative economies. We are a major Stupid Power with ONE economy and it's completely artificial. Anyone not yet seeing how the demise of America is entirely fueled by Ben Bernanke's ridiculous focus on financial manipulation and the GOP job blockades where only paper and button pushers have family-sustaining wages is- blinded by greed. Ben Bernanke needs to be arrested TODAY and when the GOP lawyer goons run in to save him-- we pop them. America came to be because people left countries that had degraded into being what we are now. This time... let's ship off the grubbers and greed and restore Freedom Fairness Life Liberty and the Pursuit of Happiness for the rest of us.

Jul 31, 2013 9:55AM
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President Jackson got rid of the Central Bank......  He knew them for the criminals they are.
Jul 31, 2013 9:39AM
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End the QE program as fast and swift as they can ! The shock will last a few days ! Screw the investors ! The 85 billion a month has not even made in to the economy ! End QE and watch it implode for a few ! Then once the so called investors understand their free ride is over , then they will get back to sound investing and lending principals ! < That has been lost for yrs in this market.
Jul 31, 2013 7:47AM
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So here's how it's going to go today: the summation of both reports, @8:30 & 2:00, will state that the unemployment rate will remain UNCHANGED for the month of June - that's 7.6%. Why ? Almost every major city has had increases in unemployment the past month. Only 12 sectors in the US reported increases, which weren't that significant to offset other decreases. So what does that mean for investors ? That's right , come on - you can say it -  Uncle Ben will continue with QE @ 85 billion.

 

So what effect will this have on markets today ? You'll have a small drop in the beginning but around 1:00 pm, you'll see that rise up and turn positive - yes due to Ben Bernanke's comments - and then at 2:30, will rise up about 50 pts on the day. That's about as specific as I can get here -

 

So we'll see how good this forecast is; the question is, will any of you act on it ?

Jul 31, 2013 7:37AM
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Agreed...expect Ben to reiterate his same stale message today.
Jul 31, 2013 8:59AM
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Yes, by all means, the FED cannot 'scare the markets' by even hinting that the toilet paper Benny Bucks money printing will be reduced and that maybe...MAYBE...there is no recovery at all. It's all swindles, smoke and mirrors, lies, disinformation and manipulation in the Ponzi scheme to end all Ponzi schemes.
Jul 31, 2013 10:27AM
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How not to scare the market? I think old Ben has that figured out already. That's why he is going to continue throwing 85 BILLION a month at it. Just keep the printing presses running until the dollar is worthless. Yep, that ought to do it.
Jul 31, 2013 8:00AM
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Get your 401k's out as you can . they will be gone when the QE ends . Count on it as the last time it happened .
Jul 31, 2013 10:07AM
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"The Fed's challenge: How to avoid frightening markets"  If investors are not "frightened" by the indiscriminate digitizing of $83 billion per month of fiat money, its hard to imagine what would "frighten" it.  Total bankruptcy, perhaps? 

Jul 31, 2013 10:17AM
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max sparticas - if a stimulus lasts for over 4 hours call your doctor or investment broker. if Ben pulls out his QE the markets Will Go Limp. even if he doesn't increase the current Fed Rates of 0 - .25 percent, prices will skyrocket, more jobs will be lost, and what Banks loan money at will go to double digits. Ben will keep Pumping the goods in and Wall Street will keep having Orgasms'!
Jul 31, 2013 8:09AM
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Obamaville needs that printing press to keep running - if it stops, Barry won't be able to maintain his false claim that the rich are stealing the wealth of the poor.
Jul 31, 2013 10:33AM
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"The government has implemented some changes in how it calculates GDP. For example, research and development spending will now be treated as investment, and defined benefit pension plans will be measured on an accrual basis, rather than as cash." 

SILVER LINING IN REVISIONS

Adding to the better tenor of the report, comprehensive revisions to the data cast the economy in a better light than previously.

 I guess we could rationalize these new moves as caring about investers to the point of offering up creative statistics so as not to cause any irrational concern.  But definitely okay to cause irrational exuberance.

Jul 31, 2013 9:52AM
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OK- looks like the markets are ingnoring the UE numbers and going straight to what uncle Ben will say today. We might have a great day. I'll have to tweek my numbers from the low side since- well in looks like there is not going to be a low side today. It's all good !
Jul 31, 2013 11:39AM
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Well it looks like shidt head himself showed up.   Gotta go and make a juvenile comment about every post.  And he derides V.L. while he does the same shidt.  Juvenile POS Hypocrite.
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