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Why to Go Golfing on Fed Days


The structure of all Fed meeting releases varies only very slightly and those minor variations are what all the trading noise is about.


With everyone talking about the Fed tomorrow, it's worth taking a moment to run through exactly how this is going to play out, in terms of the mechanics of what the Fed is saying. Plenty of folks will tell you how they think you should trade it (or whether you should bother). For now, let's look at what the Fed is going to be communicating and how it is going to do it.

You can view all the Fed releases and the August 17 Discount Window move at the Federal Reserve site itself. If past is prelude (and it is... The Fed really doesn't want or need additional confusion in the format at this point), the 2:15 PM statement will look like this:

  • Paragraph One: Economic Growth
    Key words to look for: "Slowing", "Moderating", "Deteriorating". Any of the above or some combination of them will be used to justify the cut announced in the headline.

  • Paragraph Two: Inflation
    If the Fed is going to keep cutting, it needs to at least claim that inflation is under control. "Readings on core inflation have..." If you're looking for more cuts you want that block to end with "moderated convincingly", "eased in a sustainable way" etc. The Fed needs to make a case that inflation isn't a problem and it needs to do it in about eight words. Oil is still near an all-time high, as is food. God's speed, Ben.

  • Paragraph Three: Putting it Together
    This is where the rubber hits the road for the tea-leaf readers. In January, March, May and June, the Fed led Paragraph 3 with subtle variants on "the predominant concern is inflation". On August 7, the Fed modified the statement by leading with a mention of risk to growth before the "predominant concern is inflation" statement. That wasn't enough growth concern and the Dow lost almost 1,000 points between that statement and on August 16, when a reversal on the financials hinted that the discount window cut was in the works.

I personally think Chairman Bernanke goes with 25 bps and leads the third paragraph with something like: "The Committee's predominant concern is a dramatic slowdown in economic growth." That translates into "Damn inflation, torpedoes and all the moral-hazard whiners, we're cutting now and we'll probably be cutting more.... But, for the moment, we're keeping our powder dry and reserve the right to mess with the shorts any time we want".

However you personally may feel about that move, I think it's the action and verbiage that makes life hardest for the shorts. That means "stability" to the Fed and that's what Bernanke seems to be shooting for, from what we know of him so far.

Two things to keep in mind as this Fed Meeting gets beaten to death for the next 24 hours:

  • First, this is the structure of all Fed meeting releases. It varies only very slightly and those minor variations are what all the trading noise is about.

  • Second, the cut decision and the statement are all the Fed is going to say. One move and three short paragraphs explaining it, from which every trader on the planet is going to be trying to play it one way or another.

This is pretty much why I used to go golfing on Fed days... Trading this kind of thing is a mug's game.

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