The Fed's Language & Pundits, Analysts and Investors

This week's Fed meeting had a noted and unexpected effect on the US equity markets. Due only to a change in language, not a rate change, the equity markets rose 1.71% on Wednesday.

The logic here is interesting. Essentially, the Fed has indicated that, although it does not currently feel the economy requires a rate cut to help avoid a recession, it is now leaning more toward a rate cut as its next move, than a rate hike.

Since equity market investors react to lower rates rationally, by bidding up prices, the market rose. This is fairly direct, simple economics, with a lot of historical evidence to back it up.

That day, CNBC aired some discussions of the Fed language and rate inaction among various pundits whom they frequently feature. One of those people is Doug Kass, a prominent, bearish hedge fund manager and senior partner at SeaBreeze partners. Kass argued that the rate cut bias now means the economic is in trouble, so equities should begin to experience price declines.

I wrote this post last June, discussing economists, analysts and pundits as they criticize Ben Bernanke and the Fed. It seems very relevant again now. There's only one Ben Bernanke, and one Board of Fed Governors. Doug Kass is not on that board.

Kass' comments provide a view to a strange sort of economic analysis and commentary that seems to be quite common these days. Secondary meanings and tortured behavioral implications gain credibility over the simpler, more direct analyses of various business and economic information.

In this case, the direct analysis is that the Fed is not overly worried about a recession. It simply indicated that it is prepared to move to reduce the probabilities of such an economic development. Rick Santelli, CNBC's excellent Chicago correspondent for interest rate products, noted, correctly, that the Fed will act when it needs to. Otherwise, its words are just that.

On the other side is Kass, and another, lesser CNBC light, economics correspondent Steve Leisman. They both contend that the secondary implication of the Fed's language is that there will be a recession, and the Fed will cut rates, and equity market indices will fall soon. Notice that this interpretation requires the assumption that the Fed cuts rate, but fails to prevent a recession. Two rather significant assumptions, indeed. From second-rate, non-Fed sources.

To many investors, all these opinions may be confusing, and seem equally probable. However, the net effect of investors' behaviors this week demonstrate that they are able to understand the primary implications of the Fed's language and inaction, and believe those.

For now, this is gratifying. With so many more B-team pundits and analysts than A-team counterparts, it's amazing the primary message can sometimes make it through all the noise at all.