Traders overreact to Federal Reserve Chairman Ben Bernanke's comments. Mr. Bernanke, in his Q and A, essentially reiterated what New York Fed President William Dudley said yesterday: that any change in the flow of bond purchases will depend on the incoming data.
A question about whether the Fed might reduce bond purchases before Labor Day elicited the same reply: the Fed could reduce bond purchases in the next few meetings if the data supported it.
But stocks immediately came off their highs, bonds dropped on the comment. This seems to have been interpreted to mean there was some kind of imminent end to purchases was occurring.
Dudley warned yesterday that there was a real risk of the markets overreacting to any talk of tightening. Here is a good example of this.
Dudley also said it will take three or four months before the Fed will know if the economy is strong enough for it to begin tapering its purchases of bonds.
Most traders believe that the chances of June tapering is zero, with only a minority that something will happen in the July 30-31 meeting. Some believe the chances are higher for the September meeting, but most still think the data will likely remain weak and the Fed will not move until 2014.
If you don't think this is hard to parse, consider the two different headlines, this from Barron's: "Bernanke Doesn't Rule Out Fed Taper In the Next Few Months"; and this one at the same time from Reuters: "Bernanke Offers No Hint of Pullback in Fed Stimulus." Finally, this from AP: "Stocks Surge as Bernanke Retains Dovish Tone".
Why is this hysterical parsing happening? Because markets are now so dependent on central bank support, because organic growth is so lackluster, that any hint of premature withdraw of stimulus creates a knee-jerk reaction.
Unfortunately, we're going to have to get used to this. We're all parsing commas now, for every Fed official, into the foreseeable future.