Does the Fed Want a Correction?

The big news today comes directly from the Federal Reserve. As most of us expected, the Fed announced today that it was tapering its bond-buying program by $10 billion per month, down to asset purchases of just $55 billion per month. The move is part of the Fed’s commitment to turn down the money printing spigot gradually, and without causing much of a shock to the financial system.

In today’s Fed minutes, however, there was a significant change in the central bank’s forward guidance.
The Federal Open Market Committee, or FOMC, actually removed the previous threshold of a 6.5% unemployment rate as a trigger to prompt an interest rate rise. Here’s the money quote from the FOMC statement:

“In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress — both realized and expected — toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.”

In its previous statement, the Fed said it would begin to raise rates “well past” the time unemployment falls to 6.5%. The elimination of the 6.5% threshold might appear to be a bit “dovish” on the surface. But actually what I think is more likely is that the Fed is being a bit more “hawkish” than most think.

In fact, I wouldn’t be surprised if the Fed wants at least a small correction in stocks and bonds in order to slow the markets down from becoming too overheated for their own good.

The move also ushers in the new “Yellen era,” one that the new Fed chair would like Wall Street to perceive as tough, smart and independent.

Now, while stocks had a mild reaction to the FOMC announcement, there was some decided selling in the bond market, including a 2.69% spike in the yield on the 10-year Treasury note. That spike means bond prices got smacked. This situation could, in fact, be an investable trend going forward.

Keep your eyes on bonds. Particularly, track the 10-year Treasury note yield, as it will tell you all you really need to know about how Wall Street is reacting to the Fed’s moves.