Stock Market Misunderstands Fed Minutes, Panics

The stock market is having a not-very-good day, all because of a little misunderstanding.
This post was published on the now-closed HuffPost Contributor platform. Contributors control their own work and posted freely to our site. If you need to flag this entry as abusive, send us an email.
A broker takes a rest at the Stock Exchange in Jakarta, 23 January 2008. Indonesian share prices bounced back 7.5 percent in early trade 23 January as hopes for a market recovery were revived by a surprise rate cut in the United States overnight, dealers said. AFP PHOTO/Bay ISMOYO (Photo credit should read BAY ISMOYO/AFP/Getty Images)
A broker takes a rest at the Stock Exchange in Jakarta, 23 January 2008. Indonesian share prices bounced back 7.5 percent in early trade 23 January as hopes for a market recovery were revived by a surprise rate cut in the United States overnight, dealers said. AFP PHOTO/Bay ISMOYO (Photo credit should read BAY ISMOYO/AFP/Getty Images)

The stock market is having itself a not-very-good day, all because of a little misunderstanding.

The Dow Jones Industrial Average was recently down about 100 points with less than an hour to go in the trading day. Compared to the eye-watering market collapses of 2000 and 2001 and 2008 and 2011 and et cetera, a 100-point drop is basically a gnat fart. But still, things have been so good lately, with the stock market quietly marching upward for several weeks to five-year highs, that the 100-point selloff has people getting jumpy and using words like, um, "selloff."

So what caused all of these hurt feelings? As is often the case, dumbness. Namely, traders read, or mis-read, the minutes of the Federal Reserve's latest policy meeting and saw that "several" policy makers expressed understandable worry about the implications of the Fed's program to buy up every bond in sight in an effort to support the economy. This led immediately to a market interpretation that the Fed is about to abandon that bond-buying program, or something. Everybody panicked a little. Gold and other commodities, which thrive when the Fed is blowing cash everywhere to try and support prices, led Wednesday's "selloff."

Everybody was leaping to conclusions. For one thing, nobody really knows what the Fed means by "several." "Several" is probably more than two, but is "several" more than all of the doves on the Fed's policy making committee who favor more stimulus -- including Chairman Ben Bernanke and Vice Chairman Janet Yellen, along with New York's Bill Dudley, Chicago's Charles Evans and more? Almost certainly not. And whatever their concerns, all of the voting members voted in favor of continuing bond purchases and keeping interest rates low forever, except for perma-hawk Esther George of Kansas City.

The Fed has made it abundantly clear that it intends to keep on pumping money into the economy until unemployment shows signs of cracking, which it has not done yet. The market is worrying itself over nothing.

BTIG strategist Dan Greenhaus points out that the market overreacted in the exact same way after the last set of Fed minutes, released on January 3. Greenhaus also notes that the only reason the Fed would ever take its foot off the gas is because it thinks the economy is on the mend. That would ultimately be good news for stocks.

Correction: An earlier version of this post mis-identified Bill Dudley and Janet Yellen's positions at the Fed.

Popular in the Community

Close

What's Hot