Over the last couple of days, and after the shock to markets frm Bernanke’s comments last week, Fed officials are out to cool off the fears. Three Fed officials yesterday making comments that the Fed was still uncertain about what will happened with the QEs. Bernanke last week said the Fed would begin to taper by the end of the year pending how the economy performs. The Fed’s outlook for the economy is optimistic, that the economy is recovering and the Fed will begin backing away. Since that remark the markets convulsed into panic; interest rates increased, the stock market fell---both on significant moves. Then it was the Fed’s turn to be shocked, Bernanke’s remarks were not expected to crash markets and set of the volatility. Now the Fed is out attempting to calm markets with less hawkish comments from the likes of NY Fed Pres. Dudley yesterday and other Fed officials out making speeches.
There has been some relaxation in the bond market, the 10 yr note yield has declined from 2.65% to 2.50% early this morning but the bearish bias remains intact. Unless the US and global economies reverse and weaken the bond and mortgage markets are not likely to improve much. It is all about how the economy performs in the coming months; Bernanke made it clear in his remarks last week that the Fed’s actions moving forward is dependent on data measuring the economy’s performance. Initially no ne chose to focus on that aspect, setting off the hysteric moves last week. Now some balance being worked into the equation, but not much and the market volatility will continue with wide swings. Don’t allow yourself to believe rates will fall much; the trend is for higher interest rates, or at best trade at present levels. Bottom line: the Fed believes the economy is improving, the track record at the Fed on economic forecasting isn’t stellar by any means and markets know it. Taking the interest rate forecasts to its lowest denominator in terms of outlook---it all depends on the economy. Our view, the economy isn’t as strong as the Fed thinks, if we are correct interest rates should stabilize at present levels. That said, it isn’t our view or the Fed’s outlook that is important it is what markets think.
