It’s truly amazing how the Fed can affect global markets so dramatically, not with actions but with just a few words in a statement, or even a remark from an individual Fed governor.
How often do we see it over the years?
It doesn’t always work when conditions simply overwhelm any ability of words to have an effect. That was demonstrated by Fed Chairman Bernanke’s assurances in 2006 that housing was not in a bubble, and later that its bursting would not affect the rest of the economy, and later still that the problems were not serious enough to cause a recession.
But when problems are not as obvious, the Fed’s ability to cool off enthusiasm or halt pullbacks with just a few words is remarkable.
We seem to be seeing another example.
With global markets plunging, U.S. indexes breaking below short-term 50-day moving averages, and fear rising, markets got a boost from the minutes of the Fed’s December meeting yesterday.
And stocks are up strongly in Europe this morning on increasing expectations that the ECB will act on its promise of providing more economic stimulus if necessary to halt the eurozone’s slide toward recession. The not so subtle warnings in the minutes of the Fed’s December FOMC meeting, released yesterday, that the ECB needs to act puts more pressure on ECB to act.
And global markets are getting another big boost today from last evening’s remarks by Charles Evans, president of the Federal Reserve Bank of Chicago, a voting member of the FOMC.
He achieved world-wide attention in a speech last evening in which he said that with inflation expected to stay low until 2018, the Fed does not need to begin raising interest rates until 2016.
And markets in Europe, and pre-open indicators in the U.S. are surging higher.
It’s amazing how often the Fed can control markets without action, via simple jaw-boning to raise or lower investor expectations on whatever is the issue of the moment.
But, the remarks by Charles Evans don’t mean a lot. If markets stabilize and move higher, it would only take a remark by a different Fed governor about the need to raise rates to keep their schedule on track for rate hikes to begin in June.
We will just continue to follow our intermediate and longer-term indicators.
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Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
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