The Spectacle Blog

Fed Playing a Game of “Will They, Won’t They”

By on 9.23.13 | 11:17AM

Only days after the Federal Open Market Committee’s announcement that it won't reduce quantitative-easing bond purchases, the market lost some of the momentum that had sent the Dow to record highs. The reason? New talk of a taper.

By Friday of last week, a member of the Fed had declared that a taper could potentially be announced at the late-October meeting of the FOMC. Markets immediately reacted; by closing time on Friday the Dow had lost 174 points and the S&P had lost 13. Today the Dow has lost four points and the S&P is down one as this post goes live. This suggests, all other things being equal, that the market is a baby, reluctant to being weaned off its QE milk.

Some analysts and members of the Fed Board of Governors indicate that the Fed decision, allegedly based on bad economic data, bodes poorly for growth in the coming quarter. An analyst at Barron’s thinks that the coming political battles will be detrimental to market stability. And with Janet Yellen likely to be appointed to head the Fed, it’s possible that a taper might be deferred beyond October. If the Fed's decision to continue bond purchases at the current rate was truly based on indications of an economic slump, then there is no reason to expect that October would herald a shift in thinking, given the present outlook.

But most troublingly, it looks like the credence that the markets have given to the utterances of FOMC members has grown to endemic proportions. Fed watchers are now subject to a game of will they, won’t they. For anybody with skin in the game, it must be as aggravating as waiting for white smoke to emerge from a Vatican City chimney.

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