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The fact that Federal Reserve policy statements are pored over by investors was driven home once again when the removal of two words from the prior statement set off an intense debate over the central bank’s view of risks to the economy.
When the U.S. central bank issued its statement Wednesday, eagle-eyed Fed watchers noticed the central bank had removed “near-term” from in front of roughly balanced risks.
Since the fall of 2016, the Fed statement had said: “near-term risks to the outlook appear roughly balanced.” In the new statement, released on Wednesday, the Fed simply said “risks to the outlook appear roughly balanced.”
Krishna Guha, vice chairman of Evercore ISI and a former top Fed staffer, took the view that dropping of the two words was a move by the Fed to sidestep questions about how trade tensions and other Trump White House actions might impact the economy.
“The shift might be read as indicating a desire to focus on the medium term outlook rather than short term noise; it could simply have been an effort to evade controversy,” he said.
But overnight, Guha said that some of his clients had a different take and that the central bank was setting off alarm bells about the near-term outlook.
“A number of clients have suggested to us that the swing to risk-off in U.S. markets late Wednesday was fueled by a view that the Fed statement showed the Committee was ‘spooked’ (to use one client’s phrase) by near-term risks including around trade, the Iran nuclear deal and weaker global growth,” he said.
The Dow Jones Industrial Average has fallen by 440 points since the Fed statement was released but the 10-year Treasury note yield has held roughly steady at 2.94%.
Guha said he thought the view from some of his clients “is a stretch.”
“It is extremely unlikely that the Fed knows anything about the prospects for China trade talks or Iran nuclear negotiations that is not known by well-informed external analysts,” he said.
Rob Martin, another former Fed staffer and now a U.S. economist at UBS, said the view that dropping “near-term” is a sign of alarm “is a misread.”
Taking out “near-term” means the Fed now is much more comfortable about the outlook through 2020.
“They think things are balanced right now and for the foreseeable future” in the context that they will continue to move interest rates higher at a gradual pace, he added.
There was “no gloom” in the Fed statement, and the minutes of the meeting will show little time was spend on geopolitical issues, Martin said.
“They’re not talking about it because it is not on their minds,” he said. Trade should get a mention but most Fed officials will say they are not worried at this point, he said.