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VOL. 128 | NO. 125 | Thursday, June 27, 2013

Fed Watchers Search Recent News for Clues

By Andy Meek

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At the beginning of the week, Oppenheimer chief market technician Carter Worth released an analyst note that turned heads because of its brevity and frankness.

The bulk of it read: “We have no new thoughts. Sell.”

Stock markets around the world have been a bit hyperactive in recent days amid talk the Federal Reserve will do a so-called “tapering” of its quantitative easing program sooner rather than later. To that end, a few local investment professionals saw a variety of takeaways in recent Fed-related news and comments earlier this month from Fed Chairman Ben Bernanke.

One interesting theme they cited, for example, has to do with market volatility. Craig Dismuke, the chief economic strategist of Vining Sparks IBG LP, said that having $85 billion in monthly Fed asset purchases be data-dependent creates significant volatility, referring to the Fed’s coupling of a wind-down of its stimulus efforts to exact employment number targets.

When the Fed set its target, some analysts began to speculate that once the jobless rate even started to approach that target, the market would preemptively react, possibly go into panic mode, and force the Fed to postpone its plans.

“I think the Fed underestimated how much volatility it would create,” Dismuke said.

Bernanke’s plans included ending the Fed’s quantitative easing once the jobless rate falls below 7 percent.

“The reason markets are moving so much is that 7 percent rate Bernanke gave,” Dismuke said. “I think the market was OK with the idea of slowing purchases a little bit. But I don’t think anyone was thinking about when they would end purchases altogether.”

He added that the Fed has not made substantial improvement in the labor market, which is one part of the central bank’s dual mandate. The Fed’s charter calls for it to pursue “maximum employment” as well as price stability.


Dismuke said the Fed is now in the midst of a “very tenuous process” for reasons that include how housing will fare once record-low interest rates begin ticking higher.

Robert Trimm, chief investment officer for Legacy Wealth Management, meanwhile, also seized on Bernanke’s reference to 7 percent unemployment.

“Before this, the Fed had only made reference to 6.5 percent unemployment as the level at which they would begin to consider raising the federal funds rate,” Trimm said. “Thus, I think the market had been ‘pricing in’ continued Fed buying of treasuries and mortgage backed securities well into 2014. Bernanke is now effectively saying that QE could begin to end this year.

“I tend to be less optimistic than the Fed with regard to economic growth, and I think that rate of decline in unemployment could slow, thus elongating somewhat the Fed’s tapering strategy.”

–Robert Trimm, Legacy Wealth Management

“Given that short interest rates have been at zero for years now and inflation is below the Fed’s long-run target of 2 percent, an increase in interest rates in my mind should be a positive signal for stocks. The increase in U.S. real interest rates has certainly hammered gold. Higher interest rates would signal increasing demand for bank loans, which would eventually correspond into higher GDP growth. But then again, the Fed is now managing a $3.4 trillion portfolio in a $16 trillion economy. The size of the Fed’s balance sheet suggests higher interest rate sensitivity to small changes in expected growth than otherwise.”

Stock prices should continue to move upwards, he went on, but it’s likely to be a bumpy ride.

“I tend to be less optimistic than the Fed with regard to economic growth, and I think that rate of decline in unemployment could slow, thus elongating somewhat the Fed’s tapering strategy,” Trimm said.

PROPERTY SALES 67 67 19,513
MORTGAGES 68 68 22,501
BUILDING PERMITS 201 201 40,205
BANKRUPTCIES 62 62 12,548