Last week saw the release of the latest Federal Reserve Meeting Minutes. Various news services and pundits have already (and sufficiently) parsed that document.  But in addition to the minute’s release, several Fed Presidents gave speeches. Below I will focus on parts of Fed President Rosengren’s and Chicago President Evan’s comments as they offer insight to each president’s current economic thinking.            

Fed President Rosengren’s Speech

Fed President Rosengren’s speech contained the following two paragraphs:

It is important to remember that these market probabilities [regarding the pace of interest rate hikes] can change significantly, and rapidly. When weaker economic data are released, the probability of tightening built into futures markets falls; conversely, when stronger data are released, the probability of tightening is seen as increasing. Figure 3 shows that over the past two months, the probabilities have shifted significantly. The probability assigned to seeing no change in the federal funds rate this year was less than 30 percent two months ago, rose to over 50 percent one month ago, and most recently has returned to 38 percent.

One reason for these changing probabilities has been the weak economic data, particularly from abroad. Figure 4 shows that European and Japanese stock markets weakened significantly in the middle of February, and still remained well below their levels in the middle of December. Figure 5 shows that the declines in U.S. stock markets were more modest, and have now rebounded to levels prevailing in mid-December of last year.

Because it takes 12-18 months for a change in interest rates to completely move through the economy, analysts assume the Fed ignores short duration market events like those that occurred in the first quarter. Previous Fed statements have supported this perspective. However, Rosengren’s comments highlight an important fact: markets are excellent “real-time” sentiment measures, with prices representing the sum-total of all publicly available data. Price increases represent bullish sentiment while price declines show bearishness. Extreme volatility like that which occurred in the first quarter represents severe confusion. Rosengren’s statements certainly agrees with that analysis.