After a Federal Reserve statement and press conference that may have provided more questions than answers, and produced oddly divergent reactions in the stock and bond markets, investors will look to this week's heavy docket of Fed speakers to provide clarity about the future of monetary policy. But whether they will get the clarity they seek is a different matter.
In Wednesday's statement and the press conference that followed it, Fed Chair Janet Yellen "somehow was able to be more dovish than people expected on one hand, and more hawkish than people expected on another. It certainly lacked clarity," said Jim Iuorio of TJM Institutional Services.
The key tension on Wednesday was between the central bank's projections and its actual policy statement. In the statement, the Fed kept the language that it planned to keep the key federal funds rate target ultralow for "a considerable time after the asset purchase program ends," despite speculation that it would lose the phrase.
However, in the projections released alongside the statement, the Fed's median prediction for the fed funds rate at the end of the 2015 is now 1.375 percent, substantially above the 1.125 percent predicted in the June meeting.
Bonds seemed to take that hawkish-sounding message to heart, as yields rose sharply on Wednesday afternoon. But stocks weren't spooked at all, closing a bit higher on Wednesday and continuing the market's mildly bullish trend.
"The marketplace desperately wants clarity and credibility at this critical stage of policy path implementations," wrote David Robin of Newedge. "What they got was mixed messaging confusion and an accelerated tightening timeline. The Fed cannot have it both ways and expect the marketplace to defer to their judgment."
This week, investors will hear from a host of Fed presidents—William Dudley and Narayana Kocherlakota on Monday, Esther George on Tuesday, Loretta Mester and Charles Evans on Wednesday, and Dennis Lockhart on Thursday.
"I think their job is going to be to make the message a little more clear," said Iuorio, who says the speeches will be key to the markets in the week ahead.
The Fed speakers could end up reassuring bond investors, if they stick with the tack that Yellen took in the press conference—which is that each projection "will change over time and there's a good deal of uncertainty associated with it."
"Janet told us!" exclaimed Michael Block of Rhino Trading Partners. "She said, pay more attention to the statement than to the forecast. I don't know how much clearer she could be!"
For Block, the Fed has already made it clear that it will remain dovish for the foreseeable future. And that gives him a reason to be bullish on both equity and bond prices (which move inversely to yields).
"Stocks are catching up to that—when are bonds going to catch up to that? If someone figures out that these forecasts are just an academic game, bonds are going to rally back," he said.
But Iuorio is taking the other side of the trade.
When Dudley and Kocherlakota speak on Monday, "what I'm expecting from them is slightly guarded hawkishness," he said. "And I think rates are going to go up."
If rates keep rising, the U.S. dollar's incredible rally over the past month is likely to continue, as higher rates make keeping one's money in dollars more attractive than keeping it in other currencies.
But not everyone expects that so-called Fedspeak will have a huge impact at this point. According to Robin, the Fed's words are losing power, because the policy path only becomes more confusing and contradictory with every statement. (In one heuristic indication of how complex the Fed's policy goals have become, on Wednesday, the central bank broke the record for number of words in a statement.)
"I don't think anything the Fed says is going to make any difference or provide any clarity," the bond expert said. "The statement earlier in the week did significant damage to the Fed's messaging capability, and they have lost any level of confidence with the market."