Federal Open Market Committee minutes were released yesterday in Washington. Experience tells us the market tends to be early in terms of when the Fed will tighten policy. While QE3 currently seems like a relatively remote possibility, our comments from March 14 still capture our basic stance on the Fed, Ben Bernanke, interest rates, and inflation-protection assets:
The history of the Fed in recent years is that the Chairman tends to set policy. Since Ben Bernanke remains at the helm, we will remain open to the possibility of a third quantitative easing program (QE3), which could significantly alter the market’s general outlook and relative performance of asset classes. Another scenario, a stronger than expected economy, could discount the need for QE3, but under those conditions inflationary assets will most likely outperform defensive assets.
Bloomberg’s story on the Fed minutes may provide some insight into the debate on how accommodative policy should remain:
Federal Reserve Chairman Ben S. Bernanke may have to overcome divisions among policy makers should he seek to maintain record stimulus past June, minutes of the Fed’s March 15 meeting indicate.
A “few” among the central bank’s 17 governors and regional bank presidents said tighter credit may be warranted this year, while a “few others noted that exceptional policy accommodation could be appropriate beyond 2011,” the Federal Open Market Committee said in the minutes, released yesterday in Washington.
Even with the division, Bernanke and his top deputies, Vice Chairman Janet Yellen and New York Fed President William Dudley, are unlikely to favor tighter policy this year said Keith Hembre, a former Fed researcher. “They’re the leadership,” Hembre said. “They’ll dominate the debate and they’ll win.”
While there are many moving parts to consider in the current environment, we remain in a bull market. When the markets were on fragile ground from a short-term perspective on March 11, we stated:
Big-picture-wise and longer-term, we will give the bulls and the bull market the benefit of the doubt, until proven otherwise, since they control the long-and-intermediate-term trends.
Since the March 17 low, the bulls have recaptured the short-term trends after yielding to the bears for a short time. A stronger-than-expected economy, or more importantly, better-than-expected earnings going forward could allow asset prices to move higher even in the face of tighter monetary conditions. It is important that we monitor what is happening rather than being concerned with what we think may happen. The market will help guide us in either a bullish or bearish fashion over the coming months if we monitor it with an open mind.