Watch Market Reaction to the Fed
06/20/2014 12:01 am EST
Basically, on June 18, the FOMC did not announce much in the way of new news, so for MoneyShow's Jim Jubak, the big question now is how will the market react?
For the week ahead, watch the reaction to the Fed. On June 18, the Fed's Open Market Committee, that's its monetary rate and policy setting body, did, well, pretty much what the market expected. There was no news in particular, which made the market happy, because what the Fed said is, “hey, we see growth picking up in the economy, which was uncertain after the first quarter when we had a 1% decline in GDP,” we see employment getting better, we see inflation kicking up a little bit but still way south of the 2% that the Fed targets—1.6% is now the annual rate—and, therefore, we think that what we're going to do is just keep on keeping on. That the Fed cut its buying of Treasuries and mortgage-backed assets by another $10 billion a month, so we're now moving down to 35, which keeps the Fed on track to ending this program in 2014, and it, basically, also said that if you surveyed all of the Fed governors, that the average opinion is still that we're looking at early 2015 before we see any increase in the current zero interest rates, benchmark interest rates. So, if you put all that together, the market said, “oh boy, okay, so cheap money still for a long time, no dangers to the economy, decent growth and that's good news.”
The question is whether, as we get beyond that, people say, on day two, three, four, five, the week ahead, whether they still say, “oh, okay, so we believe the Fed on economic growth,” for example, and we're going to continue to bid up stocks, as we did right after the meeting, on the basis of that cheap money and low interest rates. So that's the thing to watch. We now know what the Fed thinks of the economy. The question is what the market's going to do with that knowledge. Going into the meeting, the market was somewhat worried that the Fed might change policy here or there, although, the consensus was they weren't going to. Now we know they're not and the question is what the market does with that. My guess, educated, I hope, is the market will say, “oh, that's all good news from our perspective, so we'll keep moving up slowly.” That's what I would expect, but we've got some worries out there. The worries are called Iraq, energy prices, oil prices, which could make the market say, “oh, okay, so, the Fed's opinion on the economy was looking backward.” Looking forward, with the possibility of rising gasoline prices, etcetera, maybe that will take something out of growth and we'd be worried about that. So, what's the reaction to the Fed not doing much of anything? Certainly nothing unexpected. That's what I'd watch for, for the week ahead.