Beyond just no rate hike, here's the real reason for today's rally

Traders work on the floor of the New York Stock Exchange.
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We have another global rally today, and you really can thank the Fed.

All around the world, we see the same pattern:

  • Stocks up
  • Bond yields down
  • Dollar down
  • Gold up
  • Crude up

Global commodities in particular are rallying 2 percent on the weak dollar.

This suggests that reporters (like myself) really were not crazy when we kept insisting that there was a substantial minority who thought the Fed might raise rates in September, and acted accordingly.

Unfortunately, many are focusing on the wrong issue.

Traders believe the Fed has become hopelessly divided, divided between a small group of hawkish dissenters and the majority that do not appear to be in a rush to raise rates (three Committee participants did not believe rates will be raised at all this year), and who do not appear overly worried that the Fed may be losing credibility by failing to act. Yellen herself has dismissed these worries, insisting there was "little risk in falling behind the curve in the near future."

All that is true, but the key takeaway is that after yesterday's performance, the trading community is convinced that the Fed is overly cautious and even a bit afraid, and that it would not take much in the way of a few disappointing economic stats for them not to hike at all until 2017.

But there's a bigger reason for the rally: The Fed has notably scaled down expectations for a future rate hike.

The median federal funds rate has declined to 1.1 percent by year-end 2017, a big drop from the 1.6 percent forecast in June. Their forecast for 2018 is down to 1.9 percent from 2.4 percent in June.

Yellen insisted that this downward revision would give the economy "a little more room to run," which is Fed speak for keeping rates lower for longer.

Bottom line: We've seen this movie way too many times. What does the Fed's timidity mean for the markets? For stocks, we are likely to be range-bound again between here and December, when another rate hike debate will take hold.

Will this dollar weakness continue? That seems unlikely as well. Remember, there are still continued easy-money policies from the ECB, the Bank of England, and the Bank of Japan.

The wild card, of course, is the elections. Do not misread the signals — the CBOE Volatility Index down to 12 and change again today, is only reflecting the expectation that trading will be calm in the next month.

That will change fast. Look for the VIX to rise in the first week of October as it begins to reflect short-term volatility around the election.