Most market participants are now expecting the Federal Reserve to start winding down its credit asset purchase program in December, after having been misguided by central bank officials who hinted it would possibly begin this month.
One wonders now what the effect will be of the Fed having blown its chance at transparency over the start of tapering. Will investors discount prices more than they would otherwise to make up for the increase in uncertainty over the Fed’s messaging? There almost certainly has to be some price to pay for the Fed acting like the classic Peanuts cartoon series in which Lucy, acting as holder for a punt, pulls the football away from Charlie Brown just as he’s about to kick it. The Fed tarnished its credibility last week, and now my guess is that we will see an increase of volatility as bulls and bears hash out the meaning of the central bank’s next round of speeches and testimony.
At the very least, the increase in uncertainty over the “data dependency” of tapering, and the Fed’s changing views of what that actually means will likely act as a brake on the market’s advance. For a century, investors have had a simple adage burned into their brain: “Don’t fight the Fed.” But now it’s harder to tell what the Fed actually wants, or expects, and that just adds to market participants’ anxiety at a time when most of the other investment-related information — i.e. weak U.S. corporate and emerging markets growth, plus crude oil prices and global terrorism — is unsettling.
The newest molecule of central bank news came from a statement by William Dudley, the dean of the group’s governors in his role as head of the New York Fed. He said he believes that the economy still needs a very accommodative monetary policy. He stated, “while significant progress has been made since the end of the recession, there remain a number of headwinds that have offset the improvement in the underlying fundamentals.” Basically, there has been no meaningful pickup in the economy’s forward momentum.
Meanwhile, we also learned why Richard Fisher, head of the Dallas Fed and widely respected as one of the organization’s most capable officials, disagreed with the decision not to taper. He said he believes that delaying the decision to taper calls into question the Fed’s communication credibility. Sounds familiar. Fisher is a non-voting member and his comments are in sync with comments he made in August.
Expect more comments by Fed officials in coming days, as many of them have speeches planned.
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