The Week Ahead: Will Bernanke Change Course?
Jeff Miller | Sep 15, 2013 03:35AM ET
Last week I predicted a market focus on Syria, expecting President Obama's Tuesday evening speech to be the focal point. My concept was correct, but events moved even more swiftly. The market celebrated as the chance of military action diminished.
This week's theme is easy to predict: It is all about the Fed. Will Bernanke lead the Fed to a new direction, reducing the current stimulus?
Throughout the year, and especially since the May FOMC meeting and announcement, financial markets have reflected concerns about a less stimulative policy. It has been a noisy, pundit's paradise, where each and all can claim expertise and chime in. This creates a minefield for investors, so I will highlight the key issues, and some good sources:
- Will the Fed reduce the pace of bond purchases, a change commonly referred to as "tapering" by everyone except the Fed? According to Scott Grannis sees the rise in yields as reflective of the economy – a failure of QE. His chart shows that dramatic "non-correlation."
- The Fed will probably announce a policy change. This reflects a shift in the center of FOMC opinion – more confidence in the economy, more concern about unpredictable side-effects, and more emphasis on a shift to forward guidance.
- The Fed policy will remain stimulative for about two more years. Despite this, expect another round of the debate about whether easing up on the gas pedal is the same as hitting the brake.
- The "taper equals tightening" camp is wrong on the facts, but enjoys a large audience.
- Some claim that the first Fed move is immediately projected to the final result, because markets anticipate.
- I recommend attention to the actual facts. Those who have been wrong for the last several years will be wrong again.
- There will be some negative market reaction. Not everyone expects a change, and some do not agree that it is mostly anticipated. This means there will be sellers. I expect this to be relatively modest and short-lived, given the multi-month build up.
- The Bernanke press conference will be important. I have not been a fan of the press conferences. They seem helpful, but it has not been a good venue for explanations by this particular Fed Chair. The press conference could lead to some stock market weakness, which I expect to be temporary.
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It always helps to start the week with a plan. An old military maxim says that "no plan survives the first shot." It still helps you to prepare and to react quickly.
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