Thursday, March 17, 2016

Clues To Deciphering The Fed

After speaking with former Federal Reserve chairman Ben Bernanke, best-selling author Jim Rickards may have found a way to predict the central bank’s next policy move, especially as stocks continue to struggle.

Rickards, also a senior managing director at Tangent Capital, argued that the Fed only cares about the stock market when it rallies, and not so much when it moves lower, unless of course there are extreme or disorderly declines. This asymmetry may be the main clue for investors.

“What those importuning the Fed overlook is that the Fed doesn’t care about these stock market gyrations,” said Jim Rickards, authors of Currency Wars and The Death of Money, in a blog post for West Shore Funds Tuesday. “While declining stock prices indicate tighter financial conditions, they are neither a determinant nor the object of Fed policy.”

The Fed focuses more on stock prices when they rally, he continued, like they did from 2009 to 2013. During that time, the S&P 500 and Dow Jones both jumped by roughly 105% and 89%, respectively. However, as they struggle now, the central bank doesn’t necessarily care so much, Rickards said.

“Understanding this asymmetry in the Fed’s attention to stock markets – caring on the way up, but not caring on the way down – is crucial to a sound analysis of Fed policy in the coming year,” he argued.

In other words, Rickards noted that when investors understand this notion, they can potentially predict when the Fed will make – or even halt – its next move on rates.

And, how did Rickards come to this theory? The answer lies in Ben Bernanke.

Rickards said that Bernanke told him in a “private conversation” that the central bank doesn’t care if the stock market drops by double-digits. According to Rickards, Bernanke stated that “the Fed doesn’t care if the stock market goes down 15%.”

- Source, Forbes