The Fed cometh: expect clarity on the transparent clarity being clarified

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The Federal Reserve will release its latest policy statement tomorrow afternoon, shortly after which Chairman Ben Bernanke will hold his quarterly press conference. Unlike the obfuscation that characterized the Greenspan era, Chairman Ben loves to verbally get down with the common man, becoming increasingly transparent as his term has progressed.

Increased openness isn’t the only change at the Fed. This is the first meeting for two new voting FOMC members as well as the launch of a program in which each voter actually gives their own economic forecast. “It’s a lot of new information from the Fed,” understates Jim Bianco, president of Bianco Research, in the attached clip.

Given how closely every utterance from the Fed is scrutinized, the increased transparency is apt to be a mixed blessing for traders, at least in the near-term.

“The history of Fed transparency has become very clear,” says Bianco. “Every time the Fed comes up with a new scheme to increase transparency, the market misreads it; the market reads into things that aren’t there and they overreact or they under-react.”

For less active traders the main question is whether or not “QE3” –or another round of quantitative easing– is in the cards.

Bianco says it won’t be tomorrow’s business but an additional round of the stock market’s favorite form of stimulus remains in play.

“QE3 has a less than 50% chance of happening; not completely dead but not completely on,” he predicts. Basically, another round of QE will stay in reserve just in case the economy starts slowing once more.

As for the press conference, if Bianco could hear just one thing from Bernanke it would be a definitive answer to the above-mentioned conflict between time or inflation targeting. Bianco says Bernanke is a closeted inflation target guy. That being the case, Bianco’s dream statement from Bernanke would be a definitive statement of the specific level to watch.

“If the inflation rate goes above this level we tighten, if it goes below this level we ease, and if stays in the middle we do nothing,” he says.

When economists dream, they want to know about price targeting. When traders dream, they generally want a huge knee jerk reaction so they can move to the other side. When normal human beings dream, they’d rather they didn’t have to listen to the Federal Reserve at all.