Markets Don't Want to Be Reminded

03/20/2014 11:00 am EST


Jim Jubak

Founder and Editor,

Even though yesterday's FOMC announcements were not exactly surprising or unexpected, the markets still reacted on the news, and MoneyShow's Jim Jubak thinks that may have to do with no one wanting to face reality.

The financial markets didn’t like what they heard from the Federal Open Market Committee and Federal Reserve chair Janet Yellen yesterday afternoon.

Treasuries moved lower across the yield curve with the two-year Treasury yield closing at a two-month high; the yield on the five-year rising to 1.6975%, and the yield on the 10-year Treasury closing up nine basis points to 1.725%. That took the yield on the 10-year benchmark for mortgages above the 50-day and 100-day moving averages. (Remember, bond yields go up when traders sell bonds and bond prices fall. So we’re talking about selling on today’s news.)

But what exactly didn’t the markets like?

Yes, the Federal Reserve did indeed continue to reduce its month purchases of Treasuries and mortgage-backed securities. The Fed cut another $10 billion a month from the program, to bring what was once $85 billion a month in purchases, to $55 billion.

But this was widely expected.

The Fed also threw out its own guidance of keeping short-term rates at the current 0% to 0.25% range until the unemployment rate hits 6.5%. With the unemployment rate near that level now, all of Wall Street expected the Fed to abandon that target. And so the central bank did—even if it didn’t replace it with anything concrete. The Fed will instead, Yellen said, look at a wide range of information including unemployment, inflation expectations, and financial markets.

Not terribly satisfying as guidance but, again, not unexpected.

So, then, where was the problem?

If I can judge by when selling accelerated, I’d say the problem came in Yellen’s response to a question at her press conference about what the Fed means when it says that it will keep short-term rates at their current low level for a “considerable time.” Yellen said a “considerable time” means “probably six months” after the Fed has completely wound down its program of buying Treasuries and mortgage-backed securities. If you do the math, with $55 billion a month as the current level, and six more Federal Open Market Committee meetings this year, that puts the end of the purchasing program at the end of 2014 and the beginning of any increase in rates no earlier than the mid-point of 2015.

That’s pretty much the current consensus on Wall Street, so that schedule isn’t exactly a surprise.

But I don’t think Wall Street wanted to hear it. The markets don’t want to be reminded, it seems to me, that short-term rates won’t stay near zero forever.

Maybe it is crazy to hope that rates can stay at 0% forever, but that doesn’t mean the financial markets want to face reality.

The usual Fed survey of staff and governors just rubbed the markets nose in that reality. The number of officials predicting that short-term rates would increase to 1% by the end of 2015, and to 2.25% by the end of 2016, rose.

Nothing really startling there. But I just don’t think the markets wanted to hear it.

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