The FED and the Financial Markets

Yesterday was mostly about the FED.

interest ratesToday is starting out to be the same.  No one expected the FED to hike rates at the March meeting and they met expectations, although Esther George cast a lone dissent in favor of a 0.25% hike.

The FED also revised their now infamous “Dot Plot” schematic to project the likelihood of 2 rate hikes in 2016,  whereas their former projection had called for 4 rate hikes. The media jumped all over this as if the Committee was significantly lowering their targets for tightening policy.

In reality, all the FED was did was adjust their targets to get in line with market expectations.  I doubt that 1 FED centric economist out of 100 was calling for 4 rate hikes in 2016, and really, the FED lowering their targets for rate hikes should have been totally discounted by the market.

The FED and the Financial Markets |  3-17-16

The reality is, the market reacted positively to the FED statement, and after 2½ days of consolidating the breakout move from last Friday, markets grinded higher in the last hour of the day, and are showing a measures follow through 90 minutes into trading this morning.

spy noon

$SPY 12:33 pm EDT 3-17-16

More significantly, stocks have easily shrugged off the early declines that stock index futures were showing for 2 to 3 hours before the cash market opened this morning.

I feel that markets are reacting positively much more due to comments and inferences from the Yellen regarding inflation, than their rate hike revision.

This didn’t garner many headlines from the media coverage, but I think it gives great insight toward the attitude of how the FOMC will treat their inflation target of 2%. Clearly recent data on inflation has recently shown we are well on the path toward hitting  2% annualized inflation that has been the FED’s stated target for years now.

There is no doubt that plenty of data has shown less than robust economic growth, and Yellen was quite clear that they are willing to let inflation “overshoot” their inflation target of 2% to gain confidence that the economy has enough steam behind it to maintain and  build on  its growth trajectory.

In Plain English the FED is saying “we’re going to do what we’ve always done and get so far behind the curve with our policy decisions that we have to overreact later”  

The Reality is, the stock market likes it and with 10 trading days left in Q1, the sharp selloff we had  the first 6 weeks of the year is quickly becoming a distant memory.

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