Another Fed announcement passed... let's take notice (gold settle 1694.2)

With Bernanke so commonly featured in the public spotlight, it is hardly surprising when we hear that nothing new of note is brought up during an FOMC announcement. By the time we get to hearing about "keeping rates unchanged for an extended period of time" we have already had the privilege of viewing hours of congressional testimony from Big Ben. It has almost become comical in a sense, with colleagues constantly joking "O I wonder if they'll raise rates" (wink wink) as if the Fed would try to catch an already fragile investor psyche off guard. Indeed their may be some value in scratching for hints about future action due to change in language used in the announcement. Still, it would seem that such fine tooth combing of language is indicative of the fact that there might not be a whole lot of new information in these reports. As such, it only seems logical that they shouldn't move the markets a great deal. But they do.

The impact seems to be notably in gold. I was talking with a colleague this morning and discussing how amazing it is that gold seems to sell off so violently after these announcements, even when nothing has been said. I thought maybe today would be different, but the pattern of sharp sell off on no change persisted. On a very fundamental level, one could argue that no change means no hint of qe3, which means less creation of money, which is bad for gold. Be that as it may, markets tend to price in information that is generally considered known even if it has yet to come to bare. So if for instance qe3 was an expectation, an FOMC announcement that sounded like the last would be significant, because it didn't give the market what it anticipated. But to make the argument that no qe3 causes a sell off, one would also have to suggest that there is some degree of expectation of it at this time.

My general sense of sentiment is that very few people actually expect any qe3 in the short term. With the good economic data of late, the Fed is not desperate to provide stimulus to the market. Perception dictates a great deal of what goes on in the markets, and if perception is relatively positive right now, why would the Fed decide to bring on another round of qe3? The Fed can't lower interest rates anymore, and their bag of tricks is not as vast as it once was. It seems illogical to me that with fewer weapons at its disposal, that the Fed will not choose wisely as to when to take action. This notion is hardly groundbreaking. In fact, I think 90% of traders/money managers would agree. That is why I simply don't think that the "they didn't announce qe3" theory holds any weight in explaining why gold sells off (why did equities go higher after the announcement?). It is anyone's guess as to what dynamics are at work in these sell-offs, but I have seen it enough times to feel like being anything but flat or short pre-announcement is a dangerous game.