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Is the new FOMC formula going to fail like New Coke?




Who remembers the introduction of New Coke? If you do, you might be of a certain age. It was created by the Coca-Cola Company to bump up their steadily declining soft drink market share in the mid-1980s. Pepsi was sweeter and Coke figured they needed a similar formulation to grab the attention of a growing segment of younger drinkers.

Now, you might be thinking what do New Coke and the Federal Open Market Committee (FOMC) have in common?

If you recall, the public’s reaction to New Coke was very negative — a massive marketing failure. Similarly, the current FOMC pattern of announcements regarding potential interest rate hikes is turning into a volatility disaster.

The current refrain goes like this: the Federal Reserve threatens to hike rates, the markets then get shaken. Then, the Fed confuses markets with contradictory commentary from speakers and minutes and more market volatility ensues. Then the Fed realizes things are pretty shaky in the world economy (and someone invariably lowers much-too-high global growth estimates), the Fed delays the hike and markets recover as blessed stimulus remains intact.

The problem with this, versus the heavy handed and clear message known as Quantitative Easing (QE), is that it has brought interest rate, credit, commodity and equity market volatility back with a vengeance. QE1 felt necessary, QE2 was a boon for equity holders, QE3 and Operation Twist — the selling of short-term bonds and buying of long-term bonds — were like a superfluous shot of heroin to an already “high” market.

If anything, already shaken and skeptical investors have been less inclined to put money into markets following the high volatility that we’ve witnessed in the past nine months — outflows from equities have been large lately and inflows into safe haven gold ETFs have been impressive. Uneven and contradictory Fed messaging, along with massive swings in currency and commodity markets have not been conducive to market stability.

The FOMC’s mixed messaging is hurting central bank credibility and leaving investors confused and/or on the sidelines. Confidence is important and we might conclude that the current formula isn’t doing a lot to quench their thirst for clarity. They don’t need anything sweeter, they might prefer something more bland and predictable — perhaps the old formula? Well, that may be going too far, but it wouldn’t hurt to have a Fed that is more consistent and clear with their message. A resulting reduction in volatility might allow investors to refocus on what’s important: investing again.

The views/opinions expressed herein may not necessarily be the views of AlphaPro Management Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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