Never doubt the ability of the Federal Reserve to the move the markets. We are expecting less than exciting minutes from the Fed today when they are released later today, but we could get new information about their bond buying strategy.
Yesterday, we heard from a couple of Fed officials during a volatile session. Charles Plosser and William Dudley, considered hawks, moved the markets with their comments. Dudley gave some hints about what could be in the minutes when he said that the Fed stopping its reinvestment of mortgage securities before raising rates “[might] not be the best” idea. His comments came during a speech to economists in New York.
The balance sheet will be a staggering $4.5 trillion when the current, and last, round of quantitative easing ends. The Fed is merely reinvesting its proceeds and should continue doing this. However, Dudley’s timing with his comments have sparked an interest that the Fed will offer more on this than what was heard in the previous meeting.
U.S. Markets Tumble Lower
Even though, these two officials have spoken like this in the past, the Dow Jones tumbled over 137 points to close at 16,374. The S&P 500 lost 12 points and the NASDAQ and Russell 2000 both showed losses. The Russell was down 1.5 percent and the NASDAQ lost nearly one percent to close at 4,096. The markets caught on to these commentaries and moved large sums, reallocation of capital, from big stock ETFs like the SPDR into Treasuries. By the way, Plosser reiterated his stance on the Fed tightening policy and raising rates now.
Dudley’s comments about keeping an easy monetary policy and rates the same, put a bid on Treasuries. Still, there was not much new in his comments to warrant such actions. So we need to keep an eye on today release of the minutes for the Fed’s strategy. Why has the Fed been so cautious? They are concerned about hourly wages which is happening at zero growth. They are also worried about the labor participation rate. There has been no change here and that has been figured into the price of bonds. What is not in the priced in right now? We have heard no clear discussion of exit strategy beyond tapering or live after QE. The market has not positioned itself for this yet.
The Federal Reserve on Inflation
The Fed will also make waves if it mentions inflation which has been showing some signs of picking up. We have seen stronger than expected PPI and CPI data as of late and is not in the price Yellen and Company are expecting at this point in the game. If they acknowledge that inflation is picking up, than that is a big deal. It would be a counter to what Yellen said before Congress in her last testimony.
Is the two percent inflation target a ceiling for the Fed? Dudley does not think so. There is risk behind this curve. What is the risk here? For the fixed income markets, the risk comes when the Fed puts the metal to the petal and boosts rates more aggressively. If we keep seeing inflation coming in at around 0.3, then you cannot explain this risk away.
The Fed will release their minutes at 2 pm EST along with some more speeches. We will here from Dudley at 10 am EST and Yellen will speak at New York University’s graduation commencement at 11:30. Investors will be listening to these talks with a keen ear, but we should note Dudley is and always has been a hawk. There is really nothing new to his rhetoric yet.
Binary Options Call of the Day
The question we should ask ourselves is if Treasuries are in play and if the bid will continue from yesterday. The Dollar is also showing weakness across the board and we need to watch that in the Forex Universe.
Discussion
What do you expect to come from the Fed’s Minutes? Will we finally see a clear and definitive exit strategy which takes us into life without QE? Sound off in comments below.