Fed Watching as a spectator sport

By DAVID MOON, Moon Capital Management
July 20, 2003

Despite baseball's feeble attempt to create some interest in last week's All-Star game, the boys of summer no longer hold Americans' hearts the way they once did. Michael Jordan and Larry Bird are gone from the NBA. What is our national pastime? Most people can't relate to a human the size of a small country running a 4.7 second forty-yard dash, so it's not the NFL. I'm convinced our new favorite spectator sport is Fed Watching.

At the grocery store and the barbershop. In the Tractor Supply store in Halls. Everywhere I went in mid-June, people were talking about the June Federal Reserve Board meeting. A friend in the hospital, heavily drugged and about to enter surgery, asked me, "do you think they are going to cut a quarter or half point today?" Almost as soon as the June 25 Fed meeting concluded, commentators mixed analysis of the Fed's decision with anticipation about Chairman Greenspan's next (seemingly bi-weekly) testimony in front of a group of publicity-hungry congressmen.

CNBC places cameras outside Greenspan's office to check the thickness of the Chairman's briefcase. If he's carrying a bunch of paperwork from home, does that mean they're more likely to cut rates? Do he and his wife, NBC newsperson Andrea Mitchell, really curl up in bed at night and read commodity price reports?

I see a reality show in the future - sort of a cross between The Osbournes and Louis Rukeyser.

But despite the apparent popularity of Fed Watching, the value of the pastime is questionable. Even if you had advanced copies of all of the meeting notes from the Fed meetings, what would you do? Try to make investment decisions? You might do better flipping a coin. Consider this excerpt from the June 25 Fed meeting notes:

"The committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome substantial fall in inflation exceeds that of a pickup in inflation from its already low level. On balance, the committee believes that the latter concern is likely to dominate for the foreseeable future."

Huh? In the last sentence, to what does "the latter concern" refer? The "latter" of the two possibilities suggested in the immediately preceding sentence? Or is "the latter" the second of the two immediately preceding sentences? Those two different interpretations lead to opposite conclusions. If the first interpretation is correct, the Fed believes inflation is more likely to increase than decrease. If the second interpretation is correct, the Fed is more concerned about a decline in inflation than whether or not the economy grows in the next few quarters.

My head hurts just writing that last paragraph.

If you just have to engage in this new spectator sport, I strongly suggest you participate for amusement purposes only. The Fed actually impacts very few interest rates and is usually a lagging, not leading indicator. And their actions are as hard to decipher as their words.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

Add me to your commentary distribution list.

MCM website