Fed Tuesday

The Fed meets this afternoon. Will investors be fed with a rational policy or will they be fed to the lions? Both exegesis and eisegesis are appropriate here - see the "PS" for definitions.

Here's my exegesis: based purely on the data and the statement of the last meeting, the Fed would provide a more dovish statement, perhaps take off the inflation bias in the statement only.

But I think that would be wrong - analogous to the December 2000 meeting and the May 2006 where they were simply behind the economy. In both cases, the error was recognized quickly and the incorrect policy altered before or on the next meeting. By wrong, I think that policy would be wrong AND I think they will not do that today.

Here's my eisegesis: The Fed "knows" that core year-over-year PCE is under 2% and has downtrended for many months. The Fed "should" know that their policy effect has a time lag. And they "should" know that all the delinquency increases are in variable rate subprime loans and they "should" know that billions need refinancing over the next year, particularly beginning this fall. And they "certainly" know that Democrats control Congress and a Fed policy that fights inflation primarily on the backs of the lower income people "might" generate massive political heat. And when (?) they read today's Wall Street Journal, they will know that banks are starting to have trouble making jumbo loans to good credit, well off, higher income people, since the banks now have to consider they might have to hold the loans for awhile. Golly, the country club - DC - NYC - CA upper middle class are being being affected. Those are big contributors to Democratic politicians. Maybe the rich & powerful can't get a loan on that $2 million mansion!!! Oh woe!!! So being a politically sensitive institution, the Fed "should" cut the overnight rate 25 or 50 bps. In the statement they can say that they are watching inflation closely, but recent trends in core inflation indicate that risks of inflation are lower. The risks to the economy outweigh the risks of accelerating inflation, thus a reduction in the overnight lending rate ratifying the extent market level is appropriate.

The dollar be damned! Full speed ahead!! The legal authority for the Fed does NOT include ANY direct consideration for the value of the dollar. The Fed's statuary mandate is for stable prices with maximum employment. Babblevision seers saying the dollar matters for Fed policy are either just talking their book or engaging in closet eisegesis.

PS: "Exegesis" is a $10 word meaning "critical analysis of texts". "Eisegesis" is a $100 word meaning "an interpretation that gives the interpreter's own ideas rather than the meaning of the text."

PPS: If I ran a big bank, I think it would be a good time to grab some customers. Offer fairly priced mortgage loans to people with long-standing accounts OR new, large accounts. That might get some long-term, high quality customers. Those are very expensive to attract in normal times.

P^3S: IBD says yesterday constituted a confirmation of the rally for the Dow. Reading their analysis, I see that the Dow never undercut its prior low, so that rally confirmation is correct. I suppose that also means the big caps are the leaders.

P^4S: The Fed acted like an ostrich or entrenched wonk, unable to recognize reality, so did essentially nothing. Since Bernanke was in my undergraduate class at Harvard, I'm a little embarrassed, but he lived at Princeton and DC too long and not in the woods. I suppose if the Fed governors were trying to get loans or their children were, they might have a grasp of reality. But like in December 2000 and May 2006, the Fed ivory tower fools living in the big city suburbs are unable to react to change until it grabs them and hits them in the face. So I think this drags out a few months now. I'm planning to wait and buy my last slug of financials in late October. How any well-grounded financial leader can keep tight money in the face of foreclosures for the poor is incredible to me. It's sheer Hooverism!