Markets have been increasingly sensitive to statements from the Fed, dissecting every word the Fed has to say:
- This began from the release of the latest Dot Plot of the Fed a week back. What it told us was that the Fed may raise rates earlier than expected.
- This didn't necessarily mean that the Fed will taper soon, but rather they may soon announce plans on when they may start tapering.
- The last few Fed Chairmen after Greenspan have adopted a very similar language, leaving much less room for suprises for the market, and telegraphing interest rate changes well ahead of actual changes.
- The key risk for investors in trusting the Fed's telegraphs is that they may analyze their data incorrectly
- Federal Reserve President Williams, one of the leading economic voices at the Fed (remeber Chairman Powell is not an economist), clearly indicated that it was too soon to change central bank policy.
- When Fed Chair Powell testified to Congress recently, he mainly communicated the same views as that of Williams.
- During this period, 10 Year U.S. Treasury Rates swung from 1.48 to 1.58 to 1.36 and is now simply back where it started at 1.48
While discussions on tapering and interest rate outlook will likely keep markets volatile, the Fed continues to be accommodative to a "risk-0n" type of environment, which continues to favor equity markets.