U.S. Fed Speaks, Markets Disconnect. What’s Wrong?

The U.S. Fed talks, markets move. That’s how it has always gone in the past. The question is: what to make out of it? Or, stated differently, does it make sense to even try to make something out of it?

First, let’s see what exactly the message of the U.S. Fed was, specifically on Thursday (Dallas Fed President) and Friday (Mrs. Janet Yellen).

The Globe and Mail writes:

Dallas Fed President Robert Kaplan on Thursday advocated a go-slow approach to further tightening after two hikes so far this year, saying he first wants to see more evidence that inflation is heading back up to the Fed’s 2-per cent goal.

Fed Chair Janet Yellen also said on Thursday that the central bank’s further rate hikes could be gradual, given persistently low inflation despite an improving economy.

CNBC interviewed Joe Duran, CEO of United Capital, who does not think the Fed will raise rates again this year, despite what Yellen has said. “He said he thinks the Fed needs to focus on unwinding its balance sheet rather than raising rates again this year.”

Economic Times notes that “almost all the central banks be it the US Federal Reserve, European Central Bank, the Bank of England or the Bank of Canada, each one is preparing the markets for a gradual withdrawal from accommodative monetary policies.”

So, all in all, it is about the absence of inflation and slow economic growth. Because of that, interest rate hikes could go slow.

The key thing investors have to understand is that these words are not correlated to market changes in a direct way. In other words, it’s not because of the fact that Mrs. Yellen says that interest rate hikes will slow down that rates do go down after her announcement. Let’s not forget that markets already continuously anticipate on what will come … so “buy the rumor sell the news” is what is mostly relevant.

What happened yesterday, right after the announcement, is visible on below chart: