Fed Now a Junior Varsity Team When It Comes to Volatility

Of all the surprises sprung upon financial markets this year, perhaps the most surprising is that 2014 is ending with a nasty bit of volatility fomented not by a closed-door gathering of policy makers who control the spigots of money flowing into the economy.

Rather, it was fomented by a closed-door gathering of policy makers who control the spigots of fuel flowing into the economy. And as such, any volatility that was to follow the last Federal Reserve meeting of the year would be -- surprise! -- just a side dish to the main course that was served by OPEC earlier in the month and still being consumed.

“We will spend the day arguing about two words that the Fed may or may not choose to use,” the ever-dramatic and cautious Mark Grant of Southwest Securities Inc. wrote in a note to clients this morning before the Fed meeting. “It is a rather ridiculous way to spend one’s time and so I won’t. I have more pressing concerns to consider.”

Those two words, referring to the “considerable time” the central bank plans to keep rates low, remained in the statement today though not exactly the way people had expected:

“Based on its current assessment, the committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the statement read. “The committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October.”

Market Reaction

Either way, the stock market’s knee-jerk reaction was to greet the statement with enthusiasm, with benchmark indexes extending their gains to more than 1.5 percent. Treasuries rose then fell in the immediate aftermath, while the dollar pared gains.

The more pressing concerns Grant wrote about -- the plunge in crude oil prices that rattled junk bond markets and shares of energy producer -- did warrant a passing reference in the statement.

“The committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate,” the Fed wrote.

Junk Debt

Speculative grade debt erased almost all of a 2014 return that was 4.34 percent at the end of November, according to a Bank of America Merrill Lynch index.

Suddenly, the yearly budget plans of everything from the governments of Russia to Venezuela and Saudi Arabia to energy master limited partnerships on the U.S. stock market contained big questions mark in the most-important spots.

The Fed met yesterday and today with the S&P 500 down as much as 5 percent in seven sessions after its last record close on Friday, Dec. 5, and Treasury yields making a bee line toward 2 percent.

The Dow Jones Industrial Average trimmed its 2014 gain to less than 3 percent by the end of yesterday, a session in which it erased a 247 point surge to close down 112 points, setting an 11-week low in the minute before the closing bell rang to stop the selling.

Is the Fed statement today and upcoming press conference from Chair Janet Yellen enough to help settle markets rattled by the plunge in oil, the ruble and junk bonds?

“The direction in which we close the year may very well depend on what occurs during the 2-3 p.m. hour today,” Raymond James investment strategist Jeffrey Saut wrote in a note to clients.


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