So the Fed has tapered again.
What does it mean?
At the December 2013 Federal Reserve Open Market Committee meeting, the group decided two very important things. First, they would trim the monthly bond buying from $85 billion to $75 billion for January 2014. Second, they would decide any further action at future meetings.
The first decision gave the markets the clarity they had wanted for so long. The second decision took that clarity away.
Now it’s time to hate the Fed…
One of the most basic needs of any decision maker, including those in financial markets, is a clear understanding of the situation.
At this point, we have almost no visibility when it comes to the biggest monetary policy decision on the table: printing money to buy bonds.
How can we see what is coming when we know the rules can change at a whim every six to eight weeks?
While the view on short-term interest rates is that they’ll remain exceptionally low for a couple of years, most of us invest and borrow based on longer-term interest rates, which are what changes with the Fed’s fast or slow tapering.
So here we are, still in limbo.
The economy appeared to have cooled at the end of the fourth quarter of 2013, with car sales slipping, new home sales dropping back, durable goods diving, and employment really falling off.
Under those circumstances, we asked ourselves: “Would the Fed hold steady at buying ‘only’ $75 billion a month?”
Then there’s the outside noise from emerging markets, where the Argentinian peso is cracking, the Turkish lira is being demolished, and natural resource producing countries of all stripes are losing ground.
So we asked ourselves: “Would the Fed see enough weakness around to hold steady, or perhaps even kick back up to $85 billion per month, providing the world with a boost?”
And then there are U.S. equity markets… those barometers that seem so out of sync with our economy but do provide a glimmer of hope for people casting about for positive signs. Lately the color of the screen has been red, filling people with anxiety.
And again we asked ourselves: “Would this be enough for the Fed to step back in and save the day?”
Today we got our answer.
The Fed announced it will trim its bond buying from $75 billion per month to $65 billion per month between now and its next meeting in mid-March. At which time it might hold steady, increase bond buying, reduce it even more, or whatever else it wants to do, based on whatever it sees in the economy at the time.
Thanks for nothing.
This is not monetary policy. This is micro-economic manipulation.
The only policy is: “We’ll keep our fingers in the pie for as long as we see fit.”
None of it makes sense. Yet, we have to live by it. Day-by-day, we wake up and ask ourselves, WWBD (what would Ben do?). Now we have to ask WWJD (what will Janet do?). We have to guess at the answers in order to form opinions and strategies for what to do in the markets.
The Fed’s constant interference in the markets and the nonsense about making independent decisions at each meeting, “based on recent data,” leads to one thing: volatility.
Expect a lot more of it in the days and weeks to come.
Markets around the world finally seem to be grasping what we’ve said for so long. That is: The Chinese debt bubble is showing signs of popping, emerging markets based on commodities are feeling the heat, Europe has not recovered, and the U.S. is barely muddling through.
Only now, there isn’t the rock-solid belief that the Fed will print more to ensure another rally. In fact, there isn’t a steadfast belief that the Fed will do anything because, as it points out, it can change its mind at any time.
Without steady ground to stand on, we all start feeling a bit shaky. It’s going to be a long year in the financial markets!
|Follow me on Twitter @RJHSDent|
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