Fed talks, no one listens

Remember those old commercials for the brokerage firm E.F. Hutton? I sure do. They were all over the T.V. when I grew up. The tagline: "When E.F. Hutton talks, people listen."

Anyway, I was reminded of that today when headlines from Federal Reserve Bank of Philadelphia President Charles Plosser hit the the tape this morning. Among them: "Fed's Plosser says 'too soon to declare victory' on inflation" and "Plosser says inflation remains his 'primary concern' for 2007."

If you were following the early 2006 playbook, you'd expect panic. You'd expect bond traders to run around like chickens with their heads cut off. But you know what impact those headlines had on bond prices and interest rates? Zero. Zippo. Zilch. Comments from San Francisco Fed President Janet Yellen yesterday evening, which included one saying: "we've got an economy that is operating pretty close to what I call full employment" had a similar effect. Namely, nothing.

Why the lack of a reaction? Fed policymakers continue to focus narrowly on goods and services inflation, completely ignoring the ginormous surge in liquidity, risk-taking, money supply, and asset prices. Measured that way, inflation is elevated but coming down slowly. So, neither rate cuts nor rate hikes are imminent, and the markets can ignore speeches like Plosser's and Yellen's. In other words, when the Fed talks these days, no one listens!