By David Nelson, CFA
Let me go right to the heart of it. If you’re invested in equities because you believe the Fed isn’t going to raise rates until 2016, then you should dump stocks right now. The normalization of interest rates has never been a question of IF but WHEN.
In less than 24 hours, 10,000 articles and research notes have been written trying to decipher everything from the omission of a phrase, to the way Janet paused between sentences.
In the end, the decision was to hit the sell button across a wide range of asset classes and take some risk off the table. This was particularly evident at the short end of the curve, where holders of 3 & 5 year paper were aggressive sellers. Bond traders were convinced the tea leaves were pointing to a Fed hike sooner than originally expected.
5 & 10 Year Yields – Intraday
The curve seemed to flatten somewhat with the selling more aggressive in the sweet spot, 3-5 years. Clearly the bigger fear isn’t the taper but the timing of the Fed’s first rate hike in years. The usual suspects were rounded up and sold; Utilities (XLU), Gold (GLD) and Emerging Markets (EEM).
Higher Rates – Good for Banks
Higher rates is good news for some. Banks are an obvious beneficiary as it helps NIM (Net Interest Margins). Interestingly many of the banks held up yesterday with JP Morgan (JPM), Citigroup (C) and Bank America (BAC) all finishing in the green.
What’s Changed?
Perhaps the biggest change came in the language. We now have new guidelines. Dropped from the statement was reference to 6.5% unemployment and 2.5% inflation. The Fed is watching a “wide range of information.” Ms. Yellen referenced 10 different labor-market indicators that she is watching. No surprise in the taper, as the Fed removed another $10 Billion from monthly purchases.
While the markets at least for now seem convinced that a hike in rates is coming sooner than expected, I think it’s important to note that Janet gave herself a lot of wiggle room. The removal of the Fed’s hard unemployment target and the addition of qualitative factors gives the Fed room to be more dovish if they need to.
Good News!
Frankly, I hope they aren’t. If they don’t raise rates by sometime in 2015, the economy has probably stalled and in danger of slipping into recession. There you have it, 10,001.
