On Wednesday, July 10th it appeared as though markets worldwide were awaiting the FOMC Meeting minutes released at 2 PM EST in the United States. When the minutes were released it was revealed that about half of the 19 members in the Federal Reserve wanted to end Quantitative Easing as early as September.
As of late this has been a big debate in the United States as the perception seems to be that when the QE program ends, so will low interest rates. In any case, after the minutes were released the markets went wild and went higher. The institutionals want higher interest rates as it means more passive income for them and their clients. High net worth individuals don’t like the idea of risk and want to store capital in a vehicle that will provide low risk, passive income. However by the end of the day the Dow drifted lower to the tune of 8 points. Not much mind you but lower none the less.
At 4:10 PM EST Ben Bernanke made a speech regarding the 100th anniversary of the Federal Reserve. At first no one thought he would mention anything regarding either interest rates or policy. He did however mention that the Federal Reserve was in no hurry to raise short term interest rates. Apparently that was all it took as the next day Thursday, July 11th the markets took off and didn’t look back. The Dow gained 169 points and the other indices fared well.
The only “fly in the ointment” that I can see is the constant misinformation we receive regarding this subject. For example; since when does tapering off the QE program have anything to do with short term interest rates? The buyback program was established to prop up the real estate market in the United States such that more business activity would occur. Activities liken to mortgage refinancing and yes home sales both existing and new.
Short term interest rates liken to the FFR (Federals Funds Rate) aka the Overnight Rate is more attuned to consumer spending as opposed to anything else. In any case what Ben Bernanke was stating (as he’s been stating since December, 2012) is that the Fed is not too keen on raising short term rates as he knows the economy is fragile and Unemployment in the United States is still at 7.6% officially; unofficially it’s more liken to 13%. This past year in the United States we’ve experienced a sequester program that still hasn’t unleashed it’s fangs yet and sometime in August I suspect that a major budget battle will occur in Congress as to what the budget will be in 2014 given that ObamaCare will be enacted then. Ben Bernanke knows that this “recovery” is unlike any other and he’s not too keen to slow it down.
The biggest problem that I see concerning the markets is the constant misinformation received. Case-in-point: two weeks ago FOMC Member Jeremy Stern mentioned in an interview that the buyback program could taper as early as September and that’s all it took to send the markets lower. Some members reiterate what Bernanke says and others do not. Therein lays the problem. Misinformation that the markets don’t like. What the markets want and what they expect is that which is considered “normal” in Corporate America. Meaning everyone sings from the same hymn book so to speak. So now the guessing game begins; when will the Fed taper? But that is the very basis of the Taper Caper”¦
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