Kevin Warsh Makes Small but Important Changes at the Fed. Here's Why They Could Result in Significant Volatility Around Future FOMC Meetings
The new Fed chair didn't change the Fed funds rate this month, but there were notable policy changes.
By CPA, David Jagielski
Kevin Warsh recently held his first Federal Open Market Committee (FOMC) meeting as Federal Reserve Chairman. While all eyes were on what would happen to interest rates (they remained unchanged), the bigger takeaway for investors is what changed in the Fed's overall approach to announcing its decisions, as that could have a more significant effect on the market this year.
There are a couple of key changes that are worth noting, because while they seem modest, they could have significant ramifications for the S&P 500 (^GSPC 1.44%) and how it performs in the future.
Guidance has been removed, and policy statements are shortened
As is often the case when companies report earnings, what's crucial for investors is the guidance and anticipating what might happen in the future. But under Warsh, the Fed will keep its cards close to its chest, and there will no longer be any forward guidance. And its policy statement will also be simplified and more brief, now around 130 words versus the 300-plus words it was before.
While these don't sound like earth-shattering changes, they give investors and analysts less information. And less information about the path forward means greater uncertainty and more question marks about what the Fed will do at future FOMC meetings. There will be a greater possibility that investors may be surprised by the Fed's announcements, which may result in greater volatility in the S&P 500 and the entire stock market.
^SPX data by YCharts
Why this could be great news for investors
If you're a long-term investor, then you don't have to worry about economic policies in the short run, because there can be a lot of noise within a span of a few months, even a year. What matters is the big picture, and that the stocks you invest in have solid fundamentals and can do well regardless of what happens with interest rates and Fed policy
At the same time, however, there could be more buying opportunities in the future. Traders and shorter-term investors may overreact to FOMC meetings and interest rate changes. And as that happens, quality stocks could become available at lower prices. Volatility can be a blessing in disguise, particularly if you're investing for the long haul, because buying stocks on short-term weakness can yield impressive results down the road.
This is why I suggest keeping not only a watch list of stocks you are considering buying, but also setting your own price targets for them that you'd buy them at, so that if they fall to those levels, even temporarily, you don't miss out on potentially fantastic buying opportunities.