Fed Leaders Reading From Different Scripts

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Fed Leaders Reading From Different Scripts

Last week, the markets reacted to the release of the March FOMC meetingminutes with a VIX level unseen since October, 2007. 

Themarkets picked up on the fact that most members seemed to agree thatconditions "were likely to warrant exceptionally low levels of thefederal funds rate for an extended period." but there was one member whosaid "communicating such an expectation would create conditions thatcould lead to financial imbalances."

That dissenter was FedGovernor Thomas Hoenig, who dropped the official line and spoke ofbubbles and raising the Fed Funds rate up to 1%, doing so at the sametime Bernanke was testifying to the fragility of the markets.  Hoenigstated:

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"In particular, whatare the hazards of holding the Federal Funds rate target close to zero?The risks of raising too soon are clear and compelling. My comments,however, concern the risks of raising rates too late. Such risks alsocan be significant but all too often seem more distant and lesscompelling, and therefore hold great long-term danger for us all...Ihave dissented at the last two FOMC meetings specifically because Ibelieve the 'extended period' language is no longer warranted and I amconcerned about the buildup of financial imbalances creating long-runrisks....And, the market appears to interpret the extended period as atleast six months. Such actions, moreover, have the effect of encouraginginvestors to place bets that rely on the continuance of exceptionallyeasy monetary policy.  I have no doubt that many on Wall Street arelooking at this as a rare opportunity."

Here is a look at the VIX forthe last 3 months, versus the VIX in the 3 months prior to the October2007 levels (clickto enlarge).


Everyone reading this knows thatpast performance is not necessarily indicative of future results, butif we're talking about reaching recent lows, the downward trajectory ofthe recent VIX decline has lasted far longer than in 2007.  Bearishsentiments are saying this is spelling imminent doom, with a marketcrash to begin as early as April 30. Bulls are loving the low volatilityand scooping up "cheap" stocks.

So, what was the DJIA doing inthis same time frame?  Let's take a look (click to enlarge).


That looks a lot more similar,although at remarkably different levels.  So, who's right? The bulls whoare bargain shopping? The bears who think the end is neigh?

Logonto the Forum to discuss."

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