Much of the market anxiety lately surrounded the Fed’s announcement of whether or not they would cut back on their bond purchases. On Wednesday we found out exactly what they intend to do going forward, and they did it with an exclamation point!
The Fed’s bold, dovish statement provided economic-forward guidance, and, indeed, the Committee was very clear about the future prospects for the economy. In a word, it is “bright.” (Note that their decision also re-affirmed that the QE program is working.)
The fear and worry (really, the uncertainty) was evident in the VIX. As I mentioned here early on Wednesday in a Realmoney.com article, the uncertainty was misplaced and untimely. The Fed has been telling us all along how to proceed. The playbook has been wide open. The key was watching the data – the same thing they told us to do – and figure it out. Since many were skeptical about a taper, the consensus thinking turned into confusion and worry. As a result, the VIX had climbed steadily nearly every day for three straight weeks. Once the Fed’s news was released, so was the stress and anxiety. When the fear of the unknown was removed and market players could get back to business, the VIX plunged nearly 16% in one day.
But one question lingers: Did the Fed really stoke the rally on Wednesday, or was it something else entirely? Alas, Chairman Bernanke did say there have been some improvements in the economy, but it still needs the support and accommodation to make sure there is no turning back. While the evidence of QE enhancement tactics is sketchy, there is a policy in place and only ONE Federal Open Market Committee. Critics often voice their opinion, but ultimately, we have to live with the decisions of the Fed.
Note that other central banks are likely to pivot off the Fed’s actions or as their situations require some adjustments. It’ll be important to watch how the markets react.
Going forward, Chairman Bernanke said the Fed will continue to cut back on their aggressive bond purchase policy, most likely by the same amount at each meeting as the data continues to warrant it. As always, he left himself and the Committee an “out clause” (some call it the Bernanke Put), stating they can/will press on the gas again if needed. This has become a long-term quest to re-establish normalization in the economy. Through their efforts, it appears that is happening, but the journey is far from over.
