Buy the Fed Rumor, Sell the Fact
Go with the Fed’s flow Thursday as Janet Yellen and her company do or don’t surprise markets
Don’t fight the Fed.
Although that phrase’s origin dates back to the early 1980s, it has never been truer than in the past eight years. Of course, in the ’80s, the Federal Reserve could just as easily tighten as loosen monetary policy. Today, many people working on Wall Street have known nothing else than monetary easing. If there was a surprise from the Fed, it was almost always a positive one.
That could change Thursday, as a two-day Fed meeting might conclude with the first increase in rates since 2006. Never has more high-priced brainpower been devoted to analyzing a decision by a bunch of economists.
But the funny thing is, all the handicapping may be in vain—at least for people with money riding on the outcome.
Buying the rumor and selling the fact has worked best. Take, for example, the announcement of the first quantitative-easing program, informally dubbed “QE1,” on Nov. 25, 2008. Between then and the time it actually was implemented just three weeks later, the yield on the benchmark 10-year Treasury note fell by a whopping three-quarters of a percentage point, and stocks rose by nearly 2%.
Another example came in August 2010, when then-Fed Chairman Ben Bernanke announced a second round of bond buying known as QE2. In a little over two months, the stock market had rallied by 14%. But from the time the program was implemented until it wound down, benchmark bond yields actually rose by more than half a percentage point, even though they were meant to fall.
The final example is the “taper tantrum” in the spring of 2013 stemming from hints about the end of QE3. Bond yields surged and stocks wobbled, but, between the time actual tapering began in December 2013 and ended in October 2014, stocks rose and bond yields fell by half a point.
So brace for Thursday’s announcement and be inspired by the words of former Fed Chairman Alan Greenspan:
“I know you think you understand what you thought I said, but I’m not sure you realize that what you heard is not what I meant.”