Stocks Slip From Highs as Market Attempts to Explode the Fed Code

Stocks finished only slightly higher today after jumping following the Fed announcement this afternoon.

AP

The S&P 500 gained 0.1% to 2,001.57, while the Dow Jones Industrial Average rose 0.2% to 17,156.85. The Nasdaq Composite advanced 0.2% to 4,562.19 and the small-company Russell 2000 finished up 0.3% at 1,153.89.

Why the reversal? Maybe it was the fact that the Federal Reserve wasn’t as dovish as equity investors first thought. Nomura’s Jens Nordvig, for one, notes that “under the surface, the Fed is getting more hawkish.” He explains why:

Interest rate projections for 2015 and 2016 shifted up notably. And the new rate projections for 2017 were also showing high numbers, not far from the 'terminal rate'. In addition, Yellen stressed many times in the press conference that the Fed's view is data dependent. Moreover, she pushed back explicitly on the notion that 'considerable time' is a calendar commitment. Hence, even with an unchanged statement, the net result is weaker forward guidance, and hence the move higher in rates on the day.

Allianz’s Steve Malin thinks the focus on whether the Fed is hawkish or dovish misses the point. Instead, it should be on certainty versus uncertainty, he says. The Fed “needs really strong evidence that it’s time to move.” That means evidence that inflation is anchored at or above 2% and that the job market is further along in its recovery, of course, but also that the financial system is equipped to handle higher rates and that the Fed has the tools it needs to raise rates and make them stick. The Fed took a big step towards the latter with its second press release of the day, in which it laid out how it would tighten monetary policy when the time comes.  Says Malin: “I would say they made progress.”