Outgoing Fed Head Ben Bernanke did not want to be remembered solely as the Fed Head who greatly expanded the economic power of the Fed. Last year, he.announced that his program to stimulate the economy known as Quantitative Easing (QE) would begin tapering, i.e., slowly decreasing monthly purchases of Treasury bonds and mortgage-backed bonds from $85 billion per month. It is expected to end completely next month.
Wall Street immediately jumped to the next question -- not when will QE end, but when will interest rates begin to increase? At her first press conference in January, incoming Fed Head Janet Yellen was asked that question and replied "Oh, six months or so," which she quickly came to regret. The bond market convulsed as bondholders sold bonds maturing in more than six months, as those bonds would decrease in value once the announcement to increase interest rates were made.
She eventually recovered by changing her statement to -- it would be "a considerable period" between the end of QE and the first interest rate increase. The bond market calmed down.
Two things have happened since then. First, the end of QE is now upon us, and, two, the economic data has been strong enough to suggest that the economy no longer needs the "training wheels" of low interest rates. Speculation has been increasing that the next meeting of the Federal Reserve Board, which ends today, would change the language, removing the word "considerable."
Yesterday, the market rallied strongly on rumors the Fed would stand pat, without dropping "considerable." Today at 2:00 PM, the minutes will be released, and we will know. If the word stays, I expect a modest rally. If it is dropped, I expect a modest sell-off.
But, more importantly, don't watch the stock market reaction -- watch the bond market!
Wall Street immediately jumped to the next question -- not when will QE end, but when will interest rates begin to increase? At her first press conference in January, incoming Fed Head Janet Yellen was asked that question and replied "Oh, six months or so," which she quickly came to regret. The bond market convulsed as bondholders sold bonds maturing in more than six months, as those bonds would decrease in value once the announcement to increase interest rates were made.
She eventually recovered by changing her statement to -- it would be "a considerable period" between the end of QE and the first interest rate increase. The bond market calmed down.
Two things have happened since then. First, the end of QE is now upon us, and, two, the economic data has been strong enough to suggest that the economy no longer needs the "training wheels" of low interest rates. Speculation has been increasing that the next meeting of the Federal Reserve Board, which ends today, would change the language, removing the word "considerable."
Yesterday, the market rallied strongly on rumors the Fed would stand pat, without dropping "considerable." Today at 2:00 PM, the minutes will be released, and we will know. If the word stays, I expect a modest rally. If it is dropped, I expect a modest sell-off.
But, more importantly, don't watch the stock market reaction -- watch the bond market!
