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Is it Time to Fight the Fed?

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The FOMC is back in session today, assessing the economy and the need for more stimulus. The meeting ends with an official statement updating the world on the Fed's outlook and any changes to monetary policy at 2:15pm/est on Wednesday. Last week the Wall Street Journal's Jon Hilsenrath reported that a fresh round of easing in some form could be announced tomorrow or during the September meeting as the Fed grows more concerned about the weak recovery. The Hilsenrath leak fueled a 4% rally over three trading sessions.

Exuberance ahead of the Fed is nothing new. Earlier this month, the Federal Reserve Bank of New York released a new study finding that anticipation alone leading up to Fed policy statements has dramatically boosted the broader market. Here's the gist:

"We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)—a phenomenon we call the pre-FOMC announcement "drift."' -David Lucca, Emanuel Moench July 11, 2012

This pre-FOMC drift has pumped the S&P 500 more than 50% higher than it would be without the gains made in the 24-hour period before Fed statements.

"There is an element of truth to this study, that the Fed has been generally a boost to the stock market, especially over the last few years," says Jim Bianco, president of Bianco Research in the attached video. But this Fed-watcher says the impact is weakening and investors shouldn't be so quick to jump when the Fed seems poised to shift its policy.

"I think there probably was a trade and a lot of the algorithmic traders and high frequency traders jumped on it years ago. But what has happened now in the era of quantitative easing, is the Fed leaks out before the official approval of quantitative easing —remember Jackson Hole in 2010—then it winds up happening several weeks later," says Bianco. "And so, by the time you get to the meeting, it's already known what's going to happen."

Critics like Jim Grant warn the Fed has already done too much in effort to debase the dollar and is creating asset bubbles and ultimately the next crisis. And there's John Hussman whose latest note highlights concern that central bank stimulus is giving investors a false sense of security that'll leave them in risky investments and blindsided by the next recession.

Gauging the Fed's next policy move has at times taken on a life of its own (see: the Greenspan briefcase), which can take investors away from what really matters. The Fed is walking a very fine line trying to maintain its independence and integrity, and not to appear to take measures to boost the equity market or cave into political pressure. But given the fact that its policy statements have triggered countless pops and drops in the market throughout the years, we find ourselves understandably captivated for another day, waiting on the Fed.

While they fight for their independence, maybe it's time investors do the same.

Does the Federal Reserve have a direct impact on your investment decisions? Let us know your thoughts on our Facebook page.

More from Breakout:

Should Congress Have the Power to Audit the Fed?

Another Half a Trillion Dollars in Fed Stimulus Is on the Way Says Munson

Fed's QE1, QE2 Failed! So Will QE3 Says Schoenberger

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