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End the Fed ... speeches

June 4, 2013: 12:02 PM ET
Fed chairman Ben Bernanke is fan of open communication. But the Fed may now be talking too much. The market has an unhealthy obsession.

Ben Bernanke is fan of transparency. But the Fed may now be talking too much. The market has an unhealthy obsession.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

When Federal Reserve chairman Ben Bernanke leaves the central bank -- perhaps as soon as next year -- he will depart with two key legacies.

The first is having helped save the U.S. economy from a fate that could have been much worse in 2008. The second is greater transparency about the inner workings of the Fed, the notion that more communication about what the Fed is thinking is a good thing.

We should all be grateful to Bernanke for the first accomplishment. The second? Not so much.

The Fed used to be shrouded in secrecy. And while that may not have been ideal, at least it meant that the financial markets were not obsessed by every little utterance from Fed members.

Related: Pimco's Bill Gross says Fed stimulus isn't working

The market functioned normally for decades without the Fed giving traders constant updates on the outlook for the economy as if they were daily weather reports or box scores from baseball games.

Nowadays, stocks and bonds turn on a dime any time a Fed official says something that could be construed as a hint about the direction of monetary policy.

"We have too many people doing way too much mental gymnastics about the Fed every day," said John Norris, managing director with Oakworth Capital Bank in Birmingham, Ala.

Related: Bernanke's 10 hilarious tips for Princeton grads

It doesn't matter if the comments are obvious (Bernanke and Fed vice chair Janet Yellen still think quantitative easing is needed? Imagine that!) or largely irrelevant.

Just look at what happened with stocks on Monday. Some attributed the market rally to comments from Atlanta Federal Reserve President Dennis Lockhart about the Fed being largely supportive of stimulus despite debates among Fed officials. Lockhart is a smart guy ... but he doesn't have a vote on the Fed's monetary policy this year. Or next year, in fact.

Sometimes, it doesn't even matter if comments are from actual Fed members.

Remember how the market mysteriously went into free-fall mode last Friday afternoon in the final hour of trading? We'll never know for certain why stocks suddenly dropped. But some attribute the decline to the release of minutes from a Federal Advisory Council meeting.

That group includes a banker from each of the Fed's 12 districts -- the CEOs of Morgan Stanley (MS), State Street (STT), PNC (PNC) and BB&T (BBT) currently serve on the council. These bankers meet four times a year to consult with the Fed. The minutes from these meetings usually don't make any ripples in the market.

Related: 4 years after the recession ended. Where is the economy now?

But according to the most recent minutes, some members expressed concerns about the Fed's mammoth asset purchase program. Worries about an "unsustainable bubble" in stocks and bonds were cited, as well as fears of how markets would react once the Fed finally starts to sell some of the bonds and other securities it has bought through QE over the past few years. And that may have helped lead the market lower late Friday.

Of course, this is a silly reason to sell stocks. The advisory council didn't say anything new. These risks have been discussed for awhile now. (Although I'm sure the Ron Paul-esque Fed conspiracy theorists could have a field day suggesting that Bernanke takes his orders from "Fat Cat" bankers.)

This is now a market that cares more about when the Fed is going to "taper" (early contender for word of the year!) QE than the actual health of the economy and earnings. Wall Street is so dependent (dare I say addicted?) to the Fed's magical liquidity machine that traders don't bother to think about what data mean other than through the lens of Fed policy. But rising interest rates may not be a sign of a market apocalypse.

"I don't think the Fed is going to do anything this year," said Jeffrey Saut, chief investment strategist for Raymond James in St. Petersburg, Fla. "To taper or not to taper, I quite frankly don't care. And if rates go up, it will be for the right reasons ... because the economy is recovering."

It doesn't help that the Fed confused matters further by saying after its last policy meeting that it was prepared to "increase or reduce" the pace of its bond buying in the coming months.

"The market is fixated on the Fed because there is so much uncertainty about the economy and what the Fed is going to do," said Daryl Jones, director of research at Hedgeye Risk Management. "People are almost forgetting about company fundamentals. This won't get resolved until the Fed finally tightens."

Related: Bond gurus say Treasuries are still safe

Take a look again at Monday's market action. The ISM manufacturing number was bad -- the sector contracted for the first time since November. There was also a report about how construction spending rose at a slower-than-expected pace in April. But stocks moved higher, partly due to this perverse thought (seemingly validated by Lockhart) that weak economic news is a good thing since it will probably mean the Fed won't have to pull back on QE this summer.

"The takeaway seems to be that investors were happy that the bad economic news might result in more stimulus or that the Fed will leave current policies in place," Norris said. "It's backwards land."

If Friday's jobs report is a good one, I sincerely hope that stocks don't go down because traders will be worried that we're moving closer to the end of QE and the beginning of interest rate hikes.

Thanks to the Fed's glasnost under Bernanke, we now all know there is a formula for when the central bank might consider raising rates from their historic lows. The unemployment rate needs to get to 6.5%. It's currently at 7.5%. So if it slips closer to 7%, it's disturbing to think that this might set off alarm bells on Wall Street as opposed to eliciting celebratory hoots and hollers.

"There is tangible evidence of improvement in the economy," said David Joy, chief market strategist with Ameriprise Financial. "And don't we eventually want the Fed to be out of the picture if it means the economic recovery is self-sustaining? The sooner that happens the better."

They say you can't fight the Fed. And that's still true. But it might be time for investors to start ignoring a lot of the Fed noise.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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