Has the Fed's Credibility Taken a Hit?
Friday, September 20, 2013
The stock market today will likely be not much different from what we saw on Thursday as the dust settles on the Fed’s Wednesday surprise. With nothing else on the economic calendar, the markets will be closely watching a clutch of Fed speakers today to get a sense of what prompted the FOMC to hold off on starting the Taper.
The market’s initial euphoric reaction to the Fed announcement Wednesday afternoon gave way to a more contemplative reaction on Thursday. This tone will likely continue today and the coming days as the market comes to grip with less clarity on the Fed’s future course. A likely casualty of this development is the Fed’s credibility. Bernanke rightly stated in his press conference that the FOMC can’t be expected to follow market expectations. But those expectations reflected what investors heard from Bernanke and other Fed officials.
The Fed may have been surprised by the spike in long-term interest rates in the wake of Taper talk, as they see QE as distinct from their long-term guidance. But the market doesn’t see it that way, as investors rightly see the Taper as the opening shot in a long-run monetary policy normalization process. The Fed’s inability to drive a wedge between Taper and tightening in investors’ minds is likely the primary reason for their decision to hold-off this week. It is unclear, however, how effective the Taper delay will turn out to be.
In corporate news, Apple (AAPL) will be in the spotlight as the company’s new set of iPhones become available to the familiar long-lines at the company’s retail outlets. The company’s stock price has regained some of its mojo back in recent days, but it still remains more than 30% below its peak in September 2012. In other news, Darden (DRI) missed expectations in its quarterly earnings report, driven by weak results at Red Lobster and Olive Garden.
Sheraz Mian
Director of Research
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