http://zerohedge.blogspot.

com/2009/04/are-fed-and-markets-on-same-
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Wednesday, April 29, 2009 Are Fed And Markets On Same Page?
Posted by Tyler Durden at 3:55 PM
Last thoughts for today from D. Rosenberg. Furthermore, the fact that
the WHO just raised the Black Swine pandemic to level 5 should force
more SPY "deleveraging" compliments of JPM, DB and UBS. To paraphrase
WHO chief Margaret Chan: "it really is all of humanity that is under
threat in a pandemic."

Mr. Market is to be respected, but he is not always correct

We find it rather difficult to square today’s Fed press statement with

the amazing reversal in investor sentiment towards euphoria over the
past several weeks. The equity market is, as we all know, a forward-
looking barometer, and now seems to have gone further than merely
pricing in “green shoots”, to discounting the righthand side of the
‘V’. Mr. Market is to be respected, but he is not always correct.

Fed has a more somber forecast than Mr. Market

The Federal Reserve does possess the largest US macroeconomic model on

the planet, and although the central bank acknowledged the obvious
today (that “the pace of contraction appears to be somewhat slower”,
which was hardly a resounding endorsement for the second-derivative
viewpoint, in our view), it seems to have a much more somber forecast
of the economy (that “economic activity is likely to remain weak for a
time”) compared to Mr. Market.
Disconnect between Fed & market’s ability to sustain rally Although
the “outlook has improved modestly since the March meeting”, the
operative word is “modestly”. In addition, the “remain weak for a
time” quote resonated with us even if the market has largely shrugged
it off. The Fed certainly does not have a perfect forecasting track
record , but let’s just say that there does appear to be a disconnect
between the central bank’s choice of words to describe the economic
backdrop and Mr. Market’s ability to sustain this vigorous rally.

Never in the past 60 years have prices dropped this much

As for Treasuries, the selloff continues unabated, and comes on a day

when real GDP contracted at over a 6% annual rate with confirmation of
a deflationary environment with the gross domestic purchase deflator
(GDP deflator ex trade) declining at a 1% annual rate on top of a 3.9%
annualized slide in the fourth quarter of 2008. In fact, at no time in
the past 60 years have we seen domestic prices fall this much over a
six-month span.

Fed views deflation as the primary risk

Perhaps the market was expecting that the Fed would announce more in
terms of the size of its bond-buying program (which was not
forthcoming) and viewed the press statement as a disappointment. But
as we stated this morning, periods of deflation in the past were
typically met with long-term yields in a 2-3% band with near
consistency. The Fed may have tweaked how it portrayed the current
climate in today’s statement, but what it did not change was its view
that deflation remains a primary risk – “the Committee sees some risks
that inflation could
persist for a time below rates that best foster economic growth and
price stability in the longer term”.

Too much slack in the economy to worry about inflation

The fact that the Fed can state this view, knowing full well that it
has dramatically expanded its balance sheet and the money supply, is a
testament to the view that the central bank has been leaning against
the winds of deflation rather than creating inflation. In our view,
the latter will be practically impossible to do in an environment
where the underlying unemployment rate is approaching 16% and capacity
utilization rates are at all-time lows of 66%. There is simply too
much slack in the economy, in our view, for us to be worried over the
prospect of inflation or a sustained bear market in bonds.