Monday, February 17, 2014

The Fairy Godmother of the Bull Market

Several times in the past, I’ve referred to Fed Governor Janet Yellen as the Fairy Godmother of the bull market. I supported this notion with a chart showing that the S&P 500 has tended to rise more often than not after she gave a speech on the economy and monetary policy. Now that she is the Fed chair, she did it again last Tuesday with her congressional testimony.

She suggested that the consensus opinion of the members of the FOMC is that the economy should continue to do well enough to justify tapering QE by $10 billion per meeting: “If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.”

Investors have gotten over their taper tantrum of last summer. Now tapering is bullish because it shows the Fed’s confidence in the economy. Either that or it shows that the FOMC has lost confidence in the efficacy of QE and would rather replace it with ultra-easy forward guidance about the federal funds rate. That’s my assessment of what’s driving the Fed. Both stock and bond investors seem to be adjusting to more forward guidance with vanishing QE.

No comments: