The initial reactions wre modest but directionally 'correct' given the dovish bias to the Fed Minutes – stocks are up, bonds are up (lower in yield), and the dollar is down. But then traders read the warnings that due to excessively easy financial conditions, "a tighter monetary policy than otherwise was warranted." and stocks sank.
There were 3 dovish quotes:
1. "Many participants, however, saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside."
2. "Participants agreed that a fall in longer-term inflation expectations would be undesirable, but they differed in their assessments of whether inflation expectations were well anchored."
3. "Most Fed officials saw wage-price framework still valid"
And bonds and the dollar were following that bias…
But stock reversed their initial gains…
As many missedthe following comment on why The Fed is tightening…
According to another view, recent rises in equity prices might be part of a broad-based adjustment of asset prices to changes in longer-term financial conditions, importantly including a lower neutral real interest rate, and, therefore, the recent equity price increases might not provide much additional impetus to aggregate spending on goods and services.
According to one view, the easing of financial conditions meant that the economic effects of the Committee's actions in gradually removing policy accommodation had been largely offset by other factors influencing financial markets, and that a tighter monetary policy than otherwise was warranted.
Translated – they are tightening because financial conditions are too easy and in an effort to push markets lower… which they're not worried about as the wealth effect has gone.
Certainly, the 'tightening' is not working…
via http://ift.tt/2wb3fNu Tyler Durden