"Don't Fight the Fed"

     The old adage used by Wall Streeters from time immemorial, "Don't fight the Fed", proved itself quite succinctly today with RBOB October futures finishing up .0625.  The highly anticipated speech by Fed Chairman Bernanke appeared to leave the door open for another round of quantitative easing to help counter higher US unemployment. This added more support to risk-appetites and fueled more gains in the crude oil market.

     Ben Bernanke has been on a mission to keep asset prices from falling since the fall of Lehman Brothers in September of 2008.  Being a life long student of the cause and persistence of asset depreciation during the "Great Depression", Mr Bernanke is willing, more than willing, to pump up commodity prices through quantative easing policies, to keep the US economy from sliding back into a deep recession.  Traders will do well to not fight the power that the Federal Reserve wields.

    Speaking at the Fed’s annual gathering in Jackson Hole, Wyoming, Mr Bernanke offered no direct promise of further intervention. But by spelling out the feeble state of the economy, the Fed’s intention to be forceful and its range of policy tools, he raised expectations of action in September.
“Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions,” said the Fed chairman on Friday.

     The clearest hint that Mr Bernanke is ready to do more came from his disappointment with the economy’s progress. He noted some recovery over the past few years but said that improvement in the labour market has been “painfully slow”. He said “unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time”.

     By midday, the S&P had rebounded from a drop after Mr Bernanke's comments, and closed up 0.5 per cent. The 10-year Treasury note rose, pushing its yield 5 basis points lower to 1.58 per cent, as markets decided Mr Bernanke’s comments did signal further easing. Mr Bernanke argued that the Fed’s forecasts of future interest rates – it anticipates rates staying low at least until late 2014 – illustrated its resolve in supporting a recovery.

     In one possible hint of future policy, he said that the current late-2014 date “is broadly consistent with prescriptions coming from a range of standard benchmarks”, but that “a number of considerations also argue for planning to keep rates low for a longer time than implied by policy rules developed during more normal periods”. That could imply a Fed policy of extending the forecast date into 2015 while making clear that it reflects a change in the central bank’s intentions rather than any downgrade to the economic outlook.

     The old adage is to be ignored at the risk of your own trading profitability, "Don't fight the Fed".