For some traders, Federal Reserve news is as addictive as any illegal substance. Think about it: They’ll pay any price and they always want more. They’re obsessed with every little hint of the Fed’s future plans. The hints are Wall Street’s “fix.”
Fed Chairman Ben Bernanke and his team, being well aware of the influence they possess, operate much like a drug treatment center. They distract the patients with harmless entertainment, while in the background they’re gradually reducing the dose. Time-consuming? Yes. Expensive? Very. But it works much better than going cold turkey.
You can see this vividly in reports from the Federal Open Market Committee (FOMC). The question everyone wants answered, of course, is really quite simple: when will the FOMC shut off the liquidity faucet? The minutes from the Dec. 11-12 policy meeting gave no answer, but it gave the addicts plenty of food for thought.
For instance, we learned “a few members” think quantitative easing (QE) should continue until “about the end” of 2013. How many is “a few?” We don’t know. We do know that “a few others” have no specific time frame, “several others” want to “slow or stop” the QE program “well before the end of 2013” and “one member” wants to slam on the brakes right now.
To sum up, we have four factions: A Few, A Few Others, Several Others and One. The first three are of unknown size, though presumably all have at least two members. The statement describes them in vague terms that leave plenty of wiggle room. They all reserve the right to change their minds, too.
So what do the Fed minutes tell us? Not much. All we really know is a bunch of bankers and economists sat around a table and talked about interest rates. Yet traders pay zillions for ultra-fast data feeds so they can learn all this a few milliseconds ahead of the competition.
Bizarre, isn’t it? But it makes sense in the big picture. Fed policy changes play out over months and years. Any single statement is just a snapshot. The snapshots take on so much importance because, to the addicts, they aren’t just words. They are a “fix.” When you are addicted to something, nothing is more important than the next fix.
Keep this in mind and you’ll see market action in a whole new way. Addicts are usually quite predictable. And whatever you do, stay out of their way.
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