The Fed Disappointed Traders, Not Investors

The Federal Open Market Committee's meeting is over, and it was worth the wait -- the outcome has important implications for investors.

This morning, I wrote:

None of the talking heads know what the outcome of the [FOMC] meeting will be; my best guess is that the Fed will try to appease the market by emphasizing the conditions that remain to be met before it can begin reducing the pace of its $85 billion monthly asset purchases. If it takes a more hawkish stance, expect some afternoon volatility.

In fact, Federal Reserve Chairman Ben Bernanke did exactly that during his press conference, stating that if the economy continues to improve consistent with the Fed's current outlook (see the Summary of Economic Projections it released today), it'll be "appropriate to moderate the monthly pace of purchases later this year."

He went even further, saying that the FOMC expects to continue buying bonds in some amount (i.e., pursuing the current open-ended quantitative easing program) until the unemployment rate drops to 7%, which the Fed believes will occur sometime next year.

That wasn't enough for the stock market, which fell sharply after the release of the FOMC's statement and during the press conference. At 2 p.m. ET, the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) were down less than 0.2%; they finished the day down 1.4% and 1.3%, respectively.

Government bond prices also fell, as the yield on the 10-year Treasury note rose 17 hundredths of a percentage point to 2.35% -- a 15-month high.

Finally, the VIX (VOLATILITYINDICES: ^VIX  ) , Wall Street's fear gauge, finished the day roughly unchanged at 16.64. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

This is where I got things wrong: We did indeed get some afternoon volatility, which I had associated with "a more hawkish stance." In fact, I had expected the FOMC and Bernanke to go further to calm markets and say that a reduction in the pace of asset purchases was not imminent (i.e., it would not occur this year). Instead, he confirmed that it was, given the current outlook.

Investors now know where they stand: Barring a seize-up in financial markets or a worsening of economic conditions, the liquidity trade's days are numbered. While the market's immediate reaction was negative, investors with a long-term value orientation should be satisfied, as fundamentals begin to drive equity markets.

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  • Report this Comment On June 20, 2013, at 1:23 AM, awallejr wrote:

    It is only "imminent" if conditions IMPROVE. I don't see that happening anytime soon. The Fed has notoriously misjudged things. Bernanke's nonresponse to the question about the President's comments about him tells me he is not coming back. He won't make any meaningful changes since he will defer to any replacement.

    People keep missing the real point. It is not about the QE, it is about the Fed interest rate which he said isn't going up anytime soon.

    Since I don't care about the short term, aside from buying opportunities, go ahead stay in cash that yields squat but I prefer the "risk" trade which I submit is not dead.

  • Report this Comment On June 20, 2013, at 1:35 AM, TMFAleph1 wrote:

    It is only "imminent" if conditions *continue to* improve.

    Fixed that for you.

  • Report this Comment On June 21, 2013, at 1:44 AM, awallejr wrote:

    No you didn't. The data has been mixed. That is why I said the Fed notoriously misjudges. It is still a question of "if."

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