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Takeaway from Hawkish Fed Minutes

/in /by

 

The bottom line of the minutes from The Fed’s March meeting was that there is little probability of the Fed doing any additional stimulus unless the economic data weakens.

In particular, this is the sentence that got markets moving: “A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below two percent.”

The important part of that statement is “could become necessary” which signals that the committee does not view any additional QE as necessary at the moment.

Effect

The minutes had a big effect on markets. Stocks were already lower heading into the release, but fell sharply post release (Dow down over 100 points) as the realization hit traders that, for now, additional accommodation is off the table.

The U.S. dollar, Euro, Gold and Treasuries were also big movers off the release, as Gold and the Euro fell hard, while the U.S. Dollar and Treasury yields moved sharply higher.

Takeaway

I had said in Monday’s issue, and throughout last week, that I thought the market had misinterpreted Bernanke’s testimony from last Monday and that is wasn’t signaling additional QE. That turned out to be correct.

For a market that has become addicted to quantitative easing and accommodation from the Fed, this news is obviously disappointing in the short term.

But, we need to see the forest for the trees here. The Fed doesn’t see the need to do additional QE because the economy appears to be getting stronger and it isn’t needed.

That is a good thing for stocks if we look beyond the very short term. It is also a good thing for commodities, even through it doesn’t look like it right now. The reason is because The Fed is not going to raise rates any time soon, and we can expect the inflationary implications of The Fed’s previous actions to begin to filter through the economy, and continue the re-inflation that has already begun.

This is a time to use short term weakness to establish a position in equities and commodities. I’m not saying to do it today, as we probably have some more selling to be done—but I will view any decline in the commodities markets based on the disappointment of less stimulus as a buying opportunity. Get your shopping list ready.

 

Bernanke Comments Don’t Signal QE3

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The market took this speech as dovish, and expectations for QE3 rose slightly. I, however, don’t particularly find the comments “dovish.” Anyone who knows to watch the average work week component in the monthly jobs data knows that we’re not seeing additional hiring because of expanding economic conditions.

Bernanke, in my opinion, just said out loud what many already know. The labor market is getting better, but it isn’t healed, and it is still very fragile.

For a while we’ve known that Bernanke and the Fed are data dependent, and if the data gets worse, they’ll be more accommodative.

We knew this coming into the speech: If the economic data gets worse, the Fed will be quick to move with more accommodative policy. If the data gets better, the Fed will be much slower to raise rates. That was the reality we all knew before the speech, and I believe that is the reality after the speech.