Fed Comments Spark Buying

After testing the 1926 support level early in the trading day the buyers again stepped back in to push stocks higher on the day. But, the real move came later in the day following the release of the FOMC minutes. Needless to say what the Fed parties discussed brought comfort to investors and we finished strong with another intraday reversal that had the major indexes trading back at previous resistance points. What were the key points of interest in the minutes? Simply put the Fed addressed the same concerns that were bothering investors and have been at the center of the recent selling. That obviously brought comfort to the buyers as they stepped in and put money to work on the belief the Fed was on their side.

The first key issue discussed was the job market growing faster than anticipated and that brought with it the desire to raise rates sooner than originally thought in 2015. However, there were two other key issues at work that worries the Fed about acting sooner rather than later on interest hikes. The first is the weak growth abroad and second, the stronger dollar. In light of the stronger dollar higher interest rates it is believed they (higher rates) would compound a negative impact on the global markets. Thus, the Fed wants to wait at least until mid-year 2015 to hike rates. That is music to investors ears as the belief has been shortening when the Fed would act to as soon as March. The delay would give more room and time for investors to maneuver the rate changes and get ahead of the curve. Throw is all together and you get the rationale for buying stocks today.

What about inflation? Good question, but the from the Fed’s view this is less of a concern as we can import cheaper goods with the strength of the dollar and that keeps inflation at bay near term. A stronger dollar also means cheaper commodities as we have seen with energy, agriculture and metals. That helps control inflation as well for the US consumer. The stronger dollar also acts as a moderator on the growth in exports as the cost of goods in the global markets are higher. Therefore it is believed that the inflation question is put off due to the stronger dollar for now. At least that is the way the Fed is going to approach this for now.

The biggest challenge facing the Fed currently is the language of keeping interest rates lower for a “considerable time”. They would like to remove this language without a disruption to the broad markets. With the minutes out and the positive reaction the ability to remove the language from the October meeting is rising, but it would be December at the latest based on analyst surveys.

The bottom line for investors is today’s minutes release from the Fed is acting as an ‘event’ on the markets. News has short life cycle of several days to several weeks. Events have a longer life cycle and some create elasticity going forward. I would say the information in the FOMC minutes was both longer term and it has potential elasticity. Look for the news to have a rolling effect on the markets going forward. This is bad for the short trades or downside move in the markets, but it could be good enough to move the major indexes back towards their previous highs. This will all unfold in the coming days. For now we have to take what the market gives and follow closely the reactions tomorrow. Some short covering on Wednesday accelerated the upside and we want to see how this unfold going forward. Plenty of work left to do so we will progress accordingly.