Market watchers are speculating a change may be occurring in how theFederal Reserve communicates with the bond market, using last week's Federal Open Market Committee statement as their forecasting medium. They said the statement, which was released after the Federal Funds rates was raised 25 basis points, stands out because it lacked any new commentary on economic issues, such as job growth and inflation.
That's a shift because the statement contains nuggets on how the Fed expects the economy to perform in the short term. The lack of any new material is considered surprising since the Fed raised numerous issues including the growing risk of inflation in its most recent minutes from the December meeting. "I don't ever recall seeing a statement as unchanged as this," said Joseph Shatz, senior government strategist at Merrill Lynch.
Susan Staywick, spokeswoman for the Federal Reserve, declined comment.
That the Fed did not seem to change its view on the economy could indicate it wants to put more emphasis on the minutes, and not the statement, to reduce volatility when the FOMC meets and give the market more clarity into its thinking, said John Herrmann, director of economic commentary at Cantor Viewpoint. The minutes are released weeks after the fact, while the statement is released the day of the meeting.
So far, it seems to be working. The 10-year yield moved just 2/10s of a basis point on the day of the release, compared to the previous movements on FOMC meeting days of up to 3bps. Herrmann expects volatility to continue to be very low in future FOMC statements, indicating market professionals overall have confidence in ChairmanAlan Greenspan. But it's a negative for traders, who are not able to make relative value plays in such a low volatility environment.
Of course, others took the unchanged statement as merely a continuation of the status quo and nothing more. "The statement was never designed to give the full breadth of the debate, only the conclusion," said Steve Ricchiuto, chief U.S. economist at ABN AMRO.
