Show of Force: More Fed Speakers Aim to Calm Markets
Another chorus of Fed speakers assured markets Friday the Fed was not going to rush to end easing, but they did not attempt to dissuade the market from the idea that reducing the bond buying program could occur later this year.
The latest to speak was San Francisco Fed President John Williams, a non voting member, who actually backed down from previous comments that, in his view, the Fed could taper easing as early as summer. In a speech Friday, he joined other Fed officials in emphasizing the Fed's actions would be dependent on economic data, and in an about face, he said it's too soon to say if it's time to slow bond buying. His remarks were prepared for delivery to the Sonoma County Economic Development Board.
A parade of Fed officials spoke with a common message—surprising because of the usual multitude of conflicting voices—since last week's meeting and comments from Chairman Ben Bernanke, detailing how the Fed could pull back on its quantitative easing program.
"It is rare for Fed officials to criticize or second guess market expectations for Fed policy, but today several FOMC officials did just that," wrote J.P. Morgan chief U.S. economist Michael Feroli.
Feroli also noted that Fed officials usually keep to a blackout period on speeches for a week after FOMC meetings. "First, Fed officials appear to be concerned about the state of the communication between the Fed and the markets. Second, this concern is most acute as it relates to expectations for the path of short-term interest rates. Third, while Fed officials appear to have concluded that the market may be coming to the wrong timing as it relates to the first rate hike, when it comes to asset purchases the concern is more qualitative. That is to say, Fed officials aren't fighting the view that tapering could come quite soon," he wrote.
Following last week's Fed meeting, markets went into convulsions, with the dollar rising, stocks falling and bond yields zipping higher, taking down emerging markets with them. But markets have cooled down, calming considerably since a parade of Fed officials began emphasizing that markets have overreacted and perhaps misinterpreted the Fed's intention. The most colorful was Dallas Fed President Richard Fisher, who pointed to the ability of some on Wall Street to act like 'feral hogs.'
Fed Gov. Jeremy Stein spoke at the Council on Foreign Relations in New York Friday morning, reiterating concerns of other Fed officials that the markets have overreacted to the idea of the Fed paring back on bond purchases, and that the Fed has no plans to change short term interest rates. Some traders took his comments to mean that the Fed would be ready to taper its program at its September meeting, and that pushed yields slightly higher and stocks lower.
"The best approach is for the committee to be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the the few weeks before the meeting - as salient as the releases may appear to be to market participants," he was quoted by Reuters as saying at the CFR meeting.
Richmond Fed President Jeffrey Lacker, at a judicial conference Friday morning, said not only is the Fed leaving the "punch bowl" in place, it will continue to "spike" the punch.
(Read More: The Fed's QE Dance Isn't Over Yet: Farr)
Dudley Thursday said the markets were "out of sync" with the Fed. He also said the "reaction of the forward and futures markets for short-term rates appears out of keeping with my assessment of the Committee's intentions, given its forecasts." He said some in the markets are pricing in a federal funds rate move in 2014, which implies a better economy than the Fed or private economists are forecasting. (New York Fed President William Dudley, a core member of the committee and Fed. Gov. Jerome Powell spoke Thursday.)
Stein, a relatively new member, first caught the market's attention with comments on the risks of monetary stimulus earlier in the year. His hypothetical comment about September Friday caught traders' attention. While many on Wall Street believe the Fed could start winding down bond purchases by year end, not all of them believe it will begin in September.
After several days of downward turbulence, stocks scored a third day of hefty gains Thursday, soothed by Fed officials who emphasized that the Fed will use economic data to steer its decision on whether to pare back on its bond buying program. The 10-year Treasury yield was back under 2.5 percent Thursday, but it moved just above 2.5 percent while Stein was speaking Friday morning. Stock futures Friday gave up some gains on his comments, and stocks closed sharply lower. The Dow was down 118 at 141,905..
"The 10-year found a level at 2.5 percent and the 30-year found a level at 3.5…people are back to buying stocks. I think when the bond market stopped going down, people figured it found a new level and it got comfortable again," said Steve Massocca of Wedbush Securities.