The Real Takeaway From the Fed Minutes

 | Sep 01, 2011 | 6:45 AM EDT
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I may be one of the younger-looking faces on the Real Money team, but don't let that fool you.

Similar to dog years, I am older when measured in market years. Never in my time following the markets in an OCD-like manner can I recall such anticipation for anything hitched to the Federal Reserve gravy train. Last Friday, it was Chairman Ben Bernanke's Jackson Hole, Wyo., speech, which was built up as a sort of second coming. But we only got a Federal Open Market Committee leader that showed a little leg, only to pull it back at the first sign of excitement.

This week, the Fed minutes from its Aug. 9 meeting were sold as a hot, must-read, self-help book that gives five ways to cure world hunger. The market ate it up, viewing it as supporting evidence (following J-Hole) that abnormal accommodation was to be announced at the two-day September Fed extravaganza. Memo to the masses: "Participants noted that devoting additional time to discussion of the possible costs and benefits of various potential tools would be useful," said the Fed.

I am fully cognizant of how the market spins these things, but to play analytical contrarian, this statement says "discussion," not "action," and suggests most on the FOMC continue to view the benefits of further easing and the risks of doing so as off kilter.

Not-So-Fun Fact

In a recent column, I insinuated that the Fed's interference in our capitalistic system with quantitative easing was gasoline poured on top of a wildfire. Since the Fed ended its second round of market contamination on June 30, essentially removing a major prop to risk markets, the S&P 500 has shed 6.5% (at the Aug. 8 lows, that number was 14.3%). Investors are hesitant to assume risk without having the Fed to invest alongside them, and that doesn't mean rock bottom interest rates for as far as the eye can see. The markets want Permanent Open Market Operations (POMO) and, in turn, paper wealth creation instead of healthy, all-natural, strong corporate-earnings growth.

For long-term investment purposes, I didn't care what the Fed had to say on extra policy tools. The comments below from the FOMC minutes struck a nerve because they support the notion that, despite the Great Recession technically being over, the remnants of the fallout linger like cigar smoke. (I wonder if these thoughts are shared by Bernanke or just his Fed friends. In his J-Hole speech he stated, "Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years.")

  • "Extended unemployment benefits could be increasing the measured unemployment rate by encouraging some workers to remain in the labor force longer than they otherwise would have."
  • "Declines in the unemployment rate that have occurred over the past year appeared to reflect primarily declines in labor force participation rather than significant gains in employment."
  • "Little evidence of pricing power among firms." (One reason why I continue to be bullish on Tiffany & Co. (TIF) is its strong pricing power globally.)

Now, to break down these comments:

  • Skills mismatch between employers and present labor pool. A fiscal plan by the Obama administration to retrofit schools does not structurally alter this dynamic, though it does spark a warm and fuzzy moment.
  • There may be more disagreement between FOMC members on many topics than widely held.
  • "Recovery" has been more about emerging market growth and U.S. inventory rebuilding than true domestic traction, either in terms of innovation or in terms of capital investment.

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