Last week the Federal Reserve surprised nearly everyone when it decided to delay the so-called “Tapering” of its asset purchases after communicating to the market that it likely would do so earlier in the year. While we are not Fed watchers (we prefer watching the Vikings, albeit the Vikings may be more painful to watch), count us as one of the surprised by the Fed action. We thought that one of the recent goals of the Fed was to become more transparent, which up until recently we believed it was successful in doing. Markets were better able to anticipate Fed moves and the Fed could see the market’s reaction to its policies, or potential policies, on a real-time basis. Not a bad deal eh?, as we say in Minnesota.
Some would say because of this the credibility of the Fed’s transparency been called into question. If so what will be the fall-out? The markets anticipated a tapering and sent out what we considered a rational price signal by moving the prices of interest rate-sensitive assets. Now those decisions likely will be called into question. And as we all know, Mr. Market doesn’t like surprises.
Therefore our question to you is what will happen next time the Fed telegraphs a potential tapering? Will the markets take the Fed at its word and treat this as a one-off after a likely change in Fed leadership or will Fed announcements in the future cause as much seemingly random behavior as a Christian Ponder pass? What do you think?