To an extent, the equity market got what it wanted today. First and foremost, the FOMC minutes reinforced the belief that additional monetary stimulus from the Federal Reserve is in the offing. This, no doubt, helped to buoy share prices through the end of the today's session. Secondly, Intel's earnings release helped kick off technology's earnings season with solid numbers. While slightly ahead of the consensus estimates on both the revenue and earnings lines, the quarter was basically in-line with expectations, especially when you consider that analyst estimates were likely lowered as a result of Intel's worrisome guidance after Q2. To me, this yet another case of a company beating lowered expectations. As I've said from the outset of this blog, perspective is key to success in the financial markets and this report is yet another case in point.
Looking more specifically at the FOMC minutes, there was a singular that stuck out to me: Fed action is coming, but the size, scope, and even the timing of this intervention is still up for serious debate. From the release:
Many participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC’s dual mandate, it would be appropriate to provide additional monetary policy accommodation. However, others thought that additional accommodation would be warranted only if the outlook worsened and the odds of deflation increased materially. Meeting participants discussed several possible approaches to providing additional accommodation but focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations.
This lack of consensus surrounding the details of any additional stimulus is probably one of the reasons why today's rally proved to be fairly muted. The other interesting tidbit in today's release was the update on the Fed's internal economic forecast. Again quoting directly:
In the economic forecast prepared for the September FOMC meeting, the staff lowered its projection for the increase in real economic activity over the second half of 2010. The staff also reduced slightly its forecast of growth next year but continued to anticipate a moderate strengthening of the expansion in 2011 as well as a further pickup in economic growth in 2012. The softer tone of incoming economic data suggested that the underlying level of demand was weaker than projected at the time of the August meeting. Moreover, the outlook for foreign economic activity also appeared a bit weaker. In the medium term, the recovery in economic activity was expected to receive support from accom-
modative monetary policy, further improvements in financial conditions, and greater household and business confidence. Over the forecast period, the increase in real GDP was projected to be sufficient to slowly reduce economic slack, although resource slack was anticipated to still remain elevated at the end of 2012.
While this update certainly builds the case for additional stimulus, I think the larger take away is that the U.S. economy remains in a very fragile state. And while monetary policy can help limit the severity of an economic downturn, it can't stimulate an economy back to robust growth (Even Milton Friedman, the king of the monetarist economists, admitted that this was the case). To an extent, this is exactly what the Fed's own forecasts are saying. In my opinion, the committee's inclination to enact another round of stimulus is a tacit admission that the Federal Reserve may be out of tools to combat this downturn. But rather than stand by and do nothing, which would be politically intolerable (so much for Fed independence), the Fed will try another round of stimulus and hope for the best. It's a dangerous game, but, for now it's the game we're all going to have to play.
Until tomorrow.....
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