From 9:00 AM EST until 2:00 PM, it was just another quiet day on Wall Street. The benchmark indices remained flat for much of the day, with occasional ripples created by Oracle Corp.‘s (ORCL) earnings announcement, Toyota Motors‘ (TM) $1.2 billion settlement and further speculation about Russia-Crimea relations.
All that changed with the clock struck 2:00, when the stock market took a turn for the worse, sending the Dow and S&P down nearly 1%.
Well, one could say that investors were “Fed up.” This afternoon, the Federal Open Market Committee (FOMC) released the minutes to its latest policy meeting. Because this is the first FOMC meeting under new Fed chair Janet Yellen, Wall Street paid particular attention to the release.
What spooked the markets is that the Fed is changing the game in terms of when it plans to increase short-term interest rates. Notably, the Fed plans to move away from using the unemployment rate as its baseline for the labor market. The unemployment rate is now close to the previous 6.5% target, but the Fed acknowledges that it’s becoming an increasingly unreliable metric. So the Fed plans on using more qualitative measures, rather than purely quantitative, to determine when to raise rates again.
The market had a kneejerk reaction to the news, but it doesn’t really change anything. Janet Yellen remains a proponent of dovish policies and has given every indication that she’ll prioritize job creation over inflationary concerns. With an accommodative chair at the helm of the Fed, I expect that rates will remain near zero for some time to come.
What was somewhat expected was that the Fed announced further plans to trim back its Quantitative Easing plan. The Fed will now buy just $25 billion in mortgage bond each month (down from $30 billion) and it will purchase $30 billion in Treasuries each month (down from $35 billion). This brings the total monthly tab to $55 billion.
If you’ll remember, the Fed purchased $85 billion in assets each month throughout 2013. Only recently has the Fed started to tighten the spigot. The Fed claims that the modest economic recovery justifies the cuts and that investors should expect further reductions at future meetings.
So this is why the markets turned sharply lower in a short amount of time. I wouldn’t advise getting caught up in jitters. Once investors have a little more time to digest the changes I expect the markets will bounce right back.