The Daily Prophet: Markets Detect Fed Doves in Hawks' Clothing

At first glance, the Federal Reserve's statement Wednesday outlining its decision to leave interest rates unchanged while moving toward shrinking its $4.5 trillion balance sheet seemed benign enough. After all, no one expected policy makers to raise rates at this meeting or start shedding assets. But a closer look revealed a Fed that may be starting to waver just a bit in its newfound hawkishness.

Specifically,some investors zeroed in on two phrases: "somewhat" and "relatively soon." In explaining its decision to raise rates in June, the Fed said at the time that inflation was running "somewhat below" its target of 2 percent. On Wednesday, it hardened that to say measures of inflation "have declined and are running below 2 percent." To many, the new language suggested maybe the Fed is worried that the slowdown is more than transitory. Also, the central bank's comment that it will start to shrink the balance sheet "relatively soon" was interpreted by some as a more open-ended expression than the "this year" that policy makers used in June. Just take a look at the action in the bond and currency markets. Treasuries jumped, sending yields lower, and the dollar promptly crashed.