The market seems to be putting the rosiest possible interpretation on Fed Chair Bernanke’s prepared remarks, which were released at 8:30 AM EDT. The key phrase appears to have been
“… with inflation subdued, we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized. In addition, even after purchases end, the Federal Reserve will be holding its stock of Treasury and agency securities off the market and reinvesting the proceeds from maturing securities, which will continue to put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”
Letting the current holdings of Treasuries and MBS mature is very positive for the bond market, which was worried about supply coming back from the Fed into the market. Treasury note futures expressed their delight:
The equity market’s general take appears to be that if tapering occurs at all (I think that it will), it is likely to be a prolonged process. The text indicated that if things continue as the FOMC expects, the program – which currently takes $85 billion monthly in bonds out of the market – will wind up around the middle of 2014. As the Fed has been very eager to point out, the discount rate at which banks can borrow from the Fed is expected to remain close to zero for the foreseeable future. That appears to me to be a vote of confidence in the continued recovery of the large banks.Â
I think that I got the gist of the statement correct when I was prognosticating yesterday, but it also appears that I did a poor job of gauging the market’s reaction. Perhaps needless to say, the SPY puts that I purchased yesterday afternoon are not showing a profit at present. The 163.50 level looks capable of providing some support on the downside, while the 169.07 high seems too close at hand not to merit a retest. As a former head trader whom I worked with was fond of remarking, “Some days you’re the windshield, some days you’re the bug.” My antennae are feeling a bit bent at present, but we’ll see how the day progresses. Dr. Bernanke gets to face his inquisitors from the House Committee on Financial Services at 10 EDT.Â
Best of luck!
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