The Fed Spoke, the Markets Reacted

September 21, 2020

Last Week in Review: The Fed Spoke, the Markets Reacted

Last Wednesday, the Federal Reserve issued its Monetary Policy Statement and held a press conference.

An unofficial mandate for the Fed is to maintain "market calm" and not say anything to roil either Stocks or Bonds. Overall, the Fed statement and press conference were extremely "dovish" -- meaning they still want loose monetary policy to help stimulate the economy.

And of course, there was no change to rates. In fact, the Fed has forecasted no hikes to the overnight Fed Funds Rate until 2024 or later.

Normally, both Stocks and Bonds would like such a backdrop. However, since Fed day, both Stocks and rates have dropped. What happened?

Bonds Love Uncertainty -- Stocks Hate it

Fed Chair Powell said, "More fiscal support is likely needed", which means the Fed can't support the "highly uncertain" economy by itself.

Translation: "Congress needs to come together quickly and agree on a fourth stimulus package to help the many people still in need."

The markets took this as a real problem in the short-term, as Congress has been unwilling to agree on a new package up until now.

Stocks have enjoyed incredible gains since the early summer and are using this "uncertain" opportunity to sell off, with Bonds and rates being the beneficiary.

Bottom line: Rates are at all-time lows, this new uncertainty of a fourth stimulus package could be short-lived, and this modest improvement caused by the uncertainty could quickly evaporate.

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