Using the same earnings call analysis we use to understand what the Federal Reserve and Federal Open Market Committee (FOMC) are thinking can provide investors with great insight on monetary policy.
Below, we review our findings from the most recent FOMC meeting to see what Powell and the rest of the committee are truly confident and questionable on.
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Investors take years off their lives trying to parse central bankers’ statements. They will come up with any method to figure out what the bankers are really thinking.
An example of this comes from when Alan Greenspan was chairman of the Federal Reserve, investors read so much into his “irrational exuberance” statement in 1996 that it caused global markets to drop dramatically.
Investors also used to look at his briefcase before walking into FOMC meetings. The theory was if the committee was going to change rates then the briefcase would be full. This is because Greenspan would need documentation to convince the other members to change the rates.
Unique methods like these are popular because central bankers play such vital roles in the market. In some ways, they are the most influential asset managers in the world. As such, it would be invaluable if someone could see inside and really know what central bankers are thinking.
We attempt to decipher what central bankers truly believe using the same earnings call analysis we use on corporate quarterly corporate earnings, identifying where management is showing real signs of “confidence” or “stress”.
Our hedge fund clients love these earnings call analyses because it provides so much information. As I like to put it, it is “the closest thing to insider trading without actually having insider information”. This is because the Earnings Call Forensics framework helps them understand what management teams are truly thinking.
We use the technology when the Fed Chairman gives his, or her, press conference after FOMC meetings.
These press conferences just started in the last decade. In only the last few years has Federal Reserve Chairman Powell spoken at a press conference at the end of every meeting. The press conference allows us to run an analysis of what he says.
The last meeting was on July 29, and captured our attention because it was relatively constructive.
Unsurprisingly, Powell appeared to be exaggerating when discussing how differentiated the Fed’s current programs are from quantitative easing. The Fed’s current injection of money directly into the system may be more similar to quantitative easing than Powell wants to lead on.
In addition, Powell may be overstating how much the committee really discloses their diversity of opinions. Many votes are unanimous or close to unanimous in the FOMC. However, the committee may not be as unified as they portray themselves to be.
On the other hand, he was highly confident when talking about the Fed’s commitment to greater transparency. This was in terms of their public review of their monetary policy strategy, tools, and communication practices.
Powell was also confident in the Fed’s commitment to doing everything it can to reach full employment and a tight labor market. In addition, Powell mentioned he wants to achieve economic recovery the correct way, ensuring the Fed’s efforts do not only end up in the pockets of the wealthiest.
Furthermore, Powell was confident about how asset purchases have been particularly beneficial in this pandemic driven crisis. Specifically, in reducing the cost to borrow for corporations and resolving issues in the credit markets.
Moreover, our readers with grave concerns about hard currency will be relieved. Powell was confident when talking about the Fed’s commitment to resolving issues with coin volumes in circulation.
In the press conference’s entirety, Powell’s confidence in the Fed’s commitment to reach full employment was encouraging, It shows the Fed has its priorities in the issues that can help the economy sustain itself, as opposed to just asset bubbles growing.
Also, his confidence in how the FOMC’s efforts have already scaled back risk in the economy should be able to keep investors bullish. The Fed is seeing that its efforts to de-risk are having great success and take the mass-default scenario off the table.
Finally, the commitment to sustainable borrowing costs for operations points to sustainability in the current credit environment.
Powell’s confidence in such key areas of the sustainability of this rally, in terms of reducing the risk of defaults, and providing broad-based economic growth, signal continued positives in the current market. In turn, they should provide assurance to investors.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research