Fed Statement Reveals An Alternate Universe

Stock traders like easy money, but they don’t like seeing the Federal Reserve basing decisions on shaky global markets.

Stocks traders are having a bit of re-think this morning on the Fed’s more hawkish tilt. After yesterday’s big stock rally, Dow futures are down about 60 points in the early going. Bond prices are down.

In what alternate universe are we living? The Fed did not tighten in September, and the statement was considered very dovish normally considered a good thing by stock traders. The Dow fell more than 300 points in the next 24 hours. Yesterday the Fed again did not tighten, but the statement hawkishly indicated the Fed would likely tighten in December.

The Dow responded with a 200 point rally.

Those crazy stock traders. What a bunch of rule breakers.

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Fed watchers and traders agreed that the FOMC statement depicted a Fed that is itching to raise the funds rate. The three major language changes were as follows:

  1. The Fed only referenced slowing job gains but expressed no concern.
  2. The Fed downgraded global concerns, and there was no mention of the dollar.
  3. The Fed specifically referenced the next meeting as the meeting where consideration of a rate hike is likely.

Why did stock traders react in this way to the new Fed?

Most likely it was because the Fed downgraded concerns the possible effect of global economies and markets. Stock traders like easy money, but they don’t like seeing the Federal Reserve basing decisions on shaky global markets.

The Fed’s direct reference to watching data until the next meeting was sort of like European Central Bank President Draghi’s hint of more stimulus to come. Oddly, the direct opposite intentions produced the same result. Stocks rallied. While we are pretty much guaranteed that Draghi will act in December, we don’t know for sure if the Fed will. The odds are higher that the Fed will move in December, but in no way is the Fed locked in for a move at the next meeting.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

October 29, 2015

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