The bells are ringing for the markets, but few are noticing.
The primary driver of all stock prices for the last 5 years has been Fed intervention. The Fed is now actively tapering its QE programs. But more importantly, Fed officials are beginning to leak that the Fed is changing course with its policies.
To understand this, you first need to note that Fed officials are public officials as well as economists. What we mean by this is that when a Fed official speaks in public, their message is carefully crafted. Fed officials hedge their views and find ways of hinting at changes without ever outright saying anything too extreme.
In this sense, it’s important to read “between the lines” when Fed officials speak. With that in mind, we need to note that the Fed is beginning to hint at a potential exit strategy to its policies.
First off, Janet Yellen hints at an interest rate hike during a press conference. Now Philadelphia Fed President Charles Plosser is criticizing the Fed’s “interventionist” actions.
Over the past five years, the Fed and, dare I say, many other central banks have become much more interventionist. I do not think this is a particularly healthy state of affairs for central banks or our economies. The crisis in the U.S. has long passed. With a growing economy and the Fed's long-term asset purchases coming to an end, now is the time to contemplate restoring some semblance of normalcy to monetary policy.
Source: Philadelphia Fed.
The translation to this: the Philadelphia Fed is aware that the Fed is out of control and needs to back off.
Then we get Fed uber-dove Bill Dudley talking about “eventual interest rate increases.”
Federal Reserve Bank of New York President William Dudley said the pace of eventual interest rate increases “will probably be relatively slow,” depending on the economy’s progress and how financial markets react.
A “mild” response “might encourage a somewhat faster pace,” Dudley said today to the New York Association for Business Economics.“If bond yields were to move sharply higher,” on the other hand, “a more cautious approach might be warranted.”
This is Bill Dudley… the man who has claimed that QE is fantastic and that inflation is too low… now openly talking about when the Fed will begin hiking rates and how it will do so.
The writing is on the Wall. The Fed has reached Peak Intervention with its policies and is now shifting gears. This process will be gradual in nature, but the alleged “exit strategy” which the Fed has been avoiding for the last five years will begin looming on the horizon.
The question now is when the markets will take note of this.
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