In case you did not notice, commodities and equities sold off considerably after the Federal Reserve released the minutes from the last policy committee meeting. The passage that I think specifically spooked the market was the following...
The Committee again discussed the possible benefits and costs of
additional asset purchases. Most participants commented that the
Committee's asset purchases had been effective in easing financial
conditions and helping stimulate economic activity, and many pointed, in
particular, to the support that low longer-term interest rates had
provided to housing or consumer durable purchases. In addition, the
Committee's highly accommodative policy was seen as helping keep
inflation over the medium term closer to its longer-run goal of 2
percent than would otherwise have been the case. Policy was also aimed
at improving the labor market outlook. In this regard, several
participants stressed the economic and social costs of high
unemployment, as well as the potential for negative effects on the
economy's longer-term path of a prolonged period of underutilization of
resources. However, many participants also expressed some concerns about
potential costs and risks arising from further asset purchases. Several
participants discussed the possible complications that additional
purchases could cause for the eventual withdrawal of policy
accommodation, a few mentioned the prospect of inflationary risks, and
some noted that further asset purchases could foster market behavior
that could undermine financial stability. Several participants noted
that a very large portfolio of long-duration assets would, under certain
circumstances, expose the Federal Reserve to significant capital losses
when these holdings were unwound, but others pointed to offsetting
factors and one noted that losses would not impede the effective
operation of monetary policy. A few also raised concerns about the
potential effects of further asset purchases on the functioning of
particular financial markets, although a couple of other participants
noted that there had been little evidence to date of such effects. In
light of this discussion, the staff was asked for additional analysis
ahead of future meetings to support the Committee's ongoing assessment
of the asset purchase program.
Several participants emphasized that the Committee should be
prepared to vary the pace of asset purchases, either in response to
changes in the economic outlook or as its evaluation of the efficacy and
costs of such purchases evolved. For example, one participant argued
that purchases should vary incrementally from meeting to meeting in
response to incoming information about the economy. A number of
participants stated that an ongoing evaluation of the efficacy, costs,
and risks of asset purchases might well lead the Committee to taper or
end its purchases before it judged that a substantial improvement in the
outlook for the labor market had occurred. Several others argued that
the potential costs of reducing or ending asset purchases too soon were
also significant, or that asset purchases should continue until a
substantial improvement in the labor market outlook had occurred. A few
participants noted examples of past instances in which policymakers had
prematurely removed accommodation, with adverse effects on economic
growth, employment, and price stability; they also stressed the
importance of communicating the Committee's commitment to maintaining a
highly accommodative stance of policy as long as warranted by economic
conditions. In this regard, a number of participants discussed the
possibility of providing monetary accommodation by holding securities
for a longer period than envisioned in the Committee's exit principles,
either as a supplement to, or a replacement for, asset purchases.
The entirety of the report can be found here and is worth the read.
The hints that the Fed may pull away the spiked punch bowl (although in my opinion way overblown) from the party sent shudders through all markets with S&P 500 down more than 1%, the NASDAQ off more than 1.5%, the United States Oil Fund off more than 2%, gold off more than 2%. What was not off was the US dollar, which gained after the release of the minutes.
Although the Fed minutes spooked the market, no where was it mentioned that the punch bowl- as in monetary easing- was going to be pulled away anytime soon. Additionally, trading in the US dollar is in no way suggesting a premature end to monetary easing. Lets take a look a the chart.
Yes, the dollar index traded up today (here represented by the Dollar Bull ETF, ticker UUP) but the volume levels were less then stellar. Just slightly more than 1.3 million shares changed hands in today's trading. This compares to the 1.6 million shares trading hands in the mid-November high. Additionally, the UUP will begin to face significant resistance just a few cents away around $22.30. I think we may some limited upside to the dollar, but that will be just about it. Besides, in a World where quantitative easing is the norm the Fed will run a serious risk but not following suit with other central banks. Quantitative easing programs by the Fed are far from over.
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