Something unexpected took took place yesterday: as we showed just after the FOMC statement hit, while the "hawks" had been pre-advised by the unofficial Fed mouthpieces to watch for instances of the word "patient" as a signal of shift in monetary policy by Yellen, the "doves" were looking for just one thing: any instance of the phrase "considerable time." Or rather the Doves' algos, because if the Fed had maintained its "considerable" language it meant the coast was clear to bid up risk to the moon.
So what happened: in a completely unexpected twist, the Fed used not only the much anticipated "patient" phrase, but - in what many speculated was a hint to the word-scanning algos that the coast was all clear to buy - it also added the "considerable time" phrase within the same paragraph. [7]To wit [7]:
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
Some promptly saw right through this cheap attempt at linguistic manipulation of the only kneejerk "market-makers" left that matter: the HFT algos that decide whether to buy or sell based on a nanosecond parsing of the Fed statement in search of specific keywords (such as "considerable time"), and then immediately going all in on the bid or ask side.
It algos were scanning for "patient" they found it.
If also were scanning for "considerable time" they found it too.
Everyone's a winner
— zerohedge (@zerohedge) December 17, 2014 [8]
And since the Fed was allegedly shifting to a hawkish posture, yet had managed to invoke the much desired "considerable time" kneejerk response which suggested an indefinite dovish posture, the market exploded higher both in the millisecond following the announcement and in the final print, and the DJIA is now up some 600 points in the past two days on the back of the Fed statement and its successful punking of a few not so bright algos.
Impossible, you say. The Fed would never stoop so low as the actually collaborate with algo "nuance" analyzers in order to goose the best possible, and thus most bullish response possible.
Really? Here's Bloomberg [9], 24 hours after our tweet:
The financial press, universally considered to be among the smartest not to mention best-looking humans on the planet, faced a conundrum yesterday when the Federal Reserve’s policy statement came out.
Much of the investment universe was fixated on whether the two words “considerable time” would remain in the central bank’s statement in reference to how long policy makers intend to keep their benchmark interest rate near zero. A quick search of the document found the phrase, and so some of the fastest typists dutifully reported its presence. Yet taking the time to actually read the paragraph showed that the Fed was moving away from those two words. The Fed was saying it would be “patient” when it comes to normalizing monetary policy, guidance it then said was consistent with the previous “considerable time” language. As the headline on the Barron’s web site put it seven minutes later: “Fed Keeps ‘Considerable Time’ Phrase – Sort Of.”
As humans struggled to understand what nuance, if any, existed between the two catch phrases, the automated computer programs that do so much of the trading these days immediately reacted and so stocks and Treasuries shot higher in tandem. Did the machines start a buying binge after a simple, successful search for “considerable time?” It’s possible, according to Paul Tetlock, an associate professor at Columbia Business School, who has researched how stocks react to news stories.
“But it’s hard to predict how automated news reading programs would react,” he said in an e-mail. “High-frequency trading firms regularly redesign their algorithms to take subtle wording nuances into account and to respond appropriately to other firms’ trading strategies.”
Actually, judging by the market reaction - which was a masterfully choreographed universal jerk higher - it was not hard to predict at all: "the Standard & Poor’s 500 Index (SPX) leapt from the 1,995 level at 1:59 p.m. New York time to 2012.47 at 2:03 p.m., a rise of almost 0.9 percent."
Of course, the Fed, like everyone else, merely caters to its audience:
The central bank, of course, must now realize that its audiences stretches well beyond the legions of “Fed watchers” in banks, brokerages and media to the all-important silicon constituency nestled together in exchange data centers.
So for all those who predicted that the Fed will indeed stoop so low as to merely engender yet another contrived, and much needed Santa Rally, by punking algos with its announcement, congratulations.
For everyone else, Bloomberg has a pun to cheer you up: "The initial rise in Treasuries sent 10-year yields from 2.105 percent at 1:59 p.m. to 2.066 percent by 2:02. The rate climbed back to 2.137 percent five minutes later. In today’s frenetic electronic trading environment, that is -- to borrow a phrase -- a "considerable time."
Ha-ha. Now back to BTFATH.
