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It’s Not Too Early to Worry about the End of Fed Easing


In trading circles, it's known as a one-minute heart attack. It's a sudden, unforeseen event that changes the investment landscape in the blink of an eye. And that's exactly what happened Thursday afternoon when the Fed's Open Market Committee (FOMC) released the minutes from its latest meeting.

"It was an amazing reaction," says Dave Lutz, head of ETF trading at Stifel, Nicolaus & Company, in reference to the rate-setting panel's latest vote count that showed an increase in the number of skeptics concerning the efficacy and longevity of the so-called QE (quantitative easing) policy. "I think the big concern was that the QE punchbowl is going to get removed sometime in 2013," he adds in the attached video, compared to prior guidance of that not happening until at least the middle of 2015.

That's a huge difference and, as Lutz points out, it sent shockwaves ''across all asset classes."

This acknowledgement of the inevitable seemed, to me, more like a statement of the obvious, especially since the Fed recently adopted its unemployment and inflation thresholds of 6.6% and 2.5% respectively. As Miller Tabak economic strategist Andrew Wilkinson points out in a note to clients today:

The discussion over the decreasing level of efficiency from the Fed’s buying binge has suddenly opened up the prospect of a chasm between the end of quantitative easing and the onset of monetary tightening. Let us make no mistake about it, there is a big difference between the two: It’s just that very few onlookers were prepared for the opening up of a chasm so soon, which in actual fact was always lurking in the not too distant future.

In the meantime, the normally vague and innocuous Fed minutes have filled a post-fiscal cliff worry void and unleashed a torrent of volatility in places most people typically don't expect to see it, such as in the so-called Treasury Vix (or the Merrill Lynch MOVE Index), which Lutz says has risen 17% in just five days.

Interestingly, it only took a single data point — the December jobs report this morning — to reverse Thursday's heart attack move, but Lutz and traders everywhere are on high alert for a rocky landscape of risk and surprises going forward. Not only from ongoing and anticipated policy spats in Washington over spending cuts and the debt ceiling, but from some far more mundane issues too, such as the annual rotation of voting members of the FOMC.

With the inclusion of regional Fed bank presidents from Chicago and Boston this year, Lutz says "it will be interesting to see the dovish turn that we could see with the composition of the new Fed board."

One thing that Lutz is sure of is that "the markets hate uncertainty," but he concedes that we'll see a lot of it over the next two months.