Why Markets Aren’t Getting the Fed’s Message – Bloomberg 06-26-13

Salient to Investors:

Justin Wolfers at University of Michigan writes:

  • Jan Hatzius at Goldman Sachs estimates that it takes $1 trillion in bond purchases to move long-term interest rates by 0.4 percent.  So the market’s recent overreaction to Benanke’s tapering comments is equivalent to cutting back on QE  by $1 trillion versus $255 billion less implied by Bernanke.
  • Investors perceived the tapering of QE as a sign that the Fed would also start raising short-term interest rates sooner than previously thought – futures currently suggest a high probability that the target rate will rise to 0.25 percent by May 2014.
  • The market’s reaction means that the Fed’s extraordinary commitment to low interest rates in the future is not yielding the desired effect – either investors don’t understand the Fed’s promise, or fear that the Fed will renege as soon as the economic outlook improves.
  • Fed officials are saying that the US economy has two drivers: one in charge of QE and the other in charge of interest rates. In reality, both drivers are in the same car facing the same environment, so markets perceive a willingness to slow the car as a lack of commitment to stimulating economic growth.

Read the full article at  http://www.bloomberg.com/news/2013-06-26/why-markets-aren-t-getting-the-fed-s-message.html

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