By: Elliot Turner
…those two magical words just won’t go away. Make that eight consecutive FOMC Meetings with no change to the terminology (thanks Brandon for the #). Ben Bernanke is a scholar who understands the impact that language has over future expectations and on promoting investments in the economy. Language is one of a central banker’s most effective tool with interest rates already at the zero-bound. Clearly the Fed remains concerned about the state of the economy and just as clearly, the discount rate hike on February 18th did not signal a policy shift just yet. The question begs, when will the Fed actually shift course and begin tightening liquidity? And, just what catalyst is it looking for to begin doing so?
The Federal Reserve has the dual mandate of promoting both full employment and price stability. Considering the fact that disinflation (or deflation) rather than inflation remains the short-run concern ,I believe that in accordance with its dual mandate, the Federal Reserve feels that it is both prudent and necessary to maintain its aggressive monetary policy stance. How and when this will change remains to be seen; however, until there is a significant uptick in employment data, downside economic risks remain discomforting. The Fed will not set an inflation in the future (a policy that will give it better control over the long end of the year curve) despite the fact that it could potentially improve the employment picture in the long-run due to the concern that they will risk their inflation fighting credentials. I am sure that this factors into the “extended period” decision for the short-run.
That being said, it is our job as traders to identify where trades live based on the information at hand. With yesterday’s financial overhaul bill put forward by Senator Dodd, and the FOMC’s decision to maintain 0% interest rates for an “extended period” one winning sector will be the regional banks. Some of these banks have had nice runs recently, but in looking at the monthly charts, several look as if they are just getting started. I am writing this from home, so I do not have access to my charting platform; however, I will post some strong ones in the a.m. With 0% interest rates, a steepening yield-curve, and a potentially more favorable regulatory environment provide just the right catalyst to further fuel the breakouts on the monthly charts.