Will the Fed surprise markets?

The central bank will announce its plans on bond buying on this afternoon. The question is how investors will react.

By Charley Blaine Sep 17, 2013 6:35PM
Federal Reserve Chairman Ben Bernanke, November 2012. © Richard Drew/AP Photo)Updated: 1:37 p.m. ET

Sometime after 2:30 p.m. ET Wednesday, Federal Reserve Chairman Ben Bernanke is expected to step to a podium at the Fed's headquarters and try to explain what the Fed is doing.

What traders across all financial markets believe the Fed will say it's doing is something like this:

It's going to announce it is tapering its $85 billion-a-month bond-buying program, known as quantitative easing, with a view toward ending the program next year. The Fed is going to keep interest rates at ultra-low levels as long as it can.

Bernanke will pledge that the Fed stands ready to support the economy and markets, if Congress and the Obama administration can't agree on spending plans or whether to raise the U.S. debt limit.

Those are the basic decisions the Fed will make, with a policy statement coming at 2 p.m. ET, along with economic projections from Fed officials. Bernanke's news conference is at  2:30. 

Stocks were down modestly Wednesday morning. The Dow Jones industrials ($INDU) were off 37 points to 15,492 at 1:37p.m. ET. The Standard & Poor's 500 Index ($INX) had dropped 2 points to 1,703. The Nasdaq Composite Index ($COMPX) was off 4 points to 3,741.

The announcement has been eagerly anticipated, almost like a drug. That's because many traders don't want to think about the expected fight over the budget, due at the end of the month, and an equally contentious fight over the nation's debt ceiling, expected in late October or November.

As a result, stocks finished modestly higher on Tuesday but are up considerably more than 4% in September. In fact, the Dow ended Tuesday looking at their best September since 2010 and second-best since the 21st century began.

But if the Fed comes up with a surprise decision -- such as a big taper -- markets could tumble in a hurry.

The vote of members of the Federal Open Market Committee, the Fed's policy-making committee, will probably include one dissent -- from Esther George, president of the Federal Reserve Bank of Kansas City. She has wanted the Fed to raise interest rates and stop its bond-buying, because she worries the Fed's policies could boost inflation pressures.

The dilemma the Fed faces is this: The QE program. now in progress. is in its third round. The goal was to help boost the economy, particularly the real estate sector, and help push cash into new investments.
The success of this round is hotly debated. The inflation hawks are sure it's going to cause problems; the evidence of real problems are, so far, thin. But the fact is as well that unemployment has come down grudgingly. Housing is recovering only slowly. Economic growth is less than 3% a year -- nothing to write home about.

When Bernanke and the Fed began to talk about tapering its quantitative easing in May, the assumption was that the central bank's monthly purchases would drop from $85 billion to maybe $65 billion. That sent bond yields soaring, even as Bernanke and others insisted they will keep interest rates low. Stocks took a dive.

But the Fed doesn't want to make a move without confirmation that the economy can handle it. That's an important concern. Jobs reports have been mediocre. Housing activity has tailed off. Back-to-school sales were flat.

Currently, the assumption is the taper, if it is announced, will be from $85 billion a month in bond purchases to maybe $75 billion. Under this theory, all of the trimming will come from the Fed's purchases of Treasury securities, now about $45 billion a month. So, purchases of mortgage securities would remain at $40 billion.

That may explain why interest rates have flattened out. The 10-year Treasury yield Wednesday was at 2.859%, up slightly from Tuesday's 2.853% and 2.98% on Sept. 5.

It also helps explain why stocks have had a terrific September. So does the easing of tensions over sarin gas use in Syria.

(-GC), down $1 to $1,308.40 on Wednesday, is off about 6% this month after rising 14% between June 30 and Aug. 31. Gold briefly traded to as low as $1,291.50. Gold hadn't traded below $1,300 since mid-July.

Brent crude in London is down more than 4% in September. It was up $1.32 to $109.46 a barrel on Wednesday. Light sweet crude oil (-CL) in New York was up $1.59 to $107.01 but is down 0.6% on the month.

There are some forces that are beyond the Fed's ability to influence:
  • The bitter gridlock in Washington that shows no signs of abating.
  • Stagnant income growth for most Americans.
  • The reluctance of business to make big new investments when they make as much profit just by laying people off.
  • The on-going influence of oil prices and retail prices for gasoline and diesel fuels.

The last point is possibly the least appreciated piece of the stagnant economy picture and the horrific 2008 market crash as well.

The retail price of gasoline has been above $3 a gallon for more than 1,000 days, starting in December 2010, according to data from AAA's Daily Fuel Gauge Report.

The national average price of gasoline has jumped 170% since January 1, 2000. Not only has that jump been a constant drag on consumer spending, but when prices first topped $3 in late 2007 and reached as high as $4.114 a gallon in July 2008, the result was the near collapse of the automobile industry in the United States.

High fuel prices contributed to the real estate crash that began after 2005. High fuel prices made it difficult to sell property in the far suburbs of major markets. High prices also added to the stress homeowners faced making monthly mortgage payments. 

Gasoline averaged $3.506 a gallon on Wednesday, according to AAA data. That was down from $3.512 a gallon Tuesday and $3.585 on Aug. 31.

Financial markets have become used to high fuel prices, and banks have been the driver of the stock market in 2013. The perception of stability may be why markets have rallied in September.

More from Top Stocks

Sep 18, 2013 7:56AM
Bring back sound investing principals back to wall street . End the QE program. Raise int rates at the fed window to 1.5 percent. Raise mortgage rates back to 5-7 percent .With 20 percent down and a 750 credit score . Its time to reward savers not borrowers. Its time to put value back i  our homes and savings. Its way pst time to get a good return in CDs and savings America. thats the true sound investing principals and a true free market . What we have today by the Feds is a socialism Wall street and not a true free market. Just free money that is not making it into the economy. And making a select few wealthy while the rest of the working class pays for it.Hult the congress spending by not raising the debt limit and keep it at 16.7 Trillion. It was good enough for 2013? it should be good enough for 2014...  Put value back in the US dollar . Fire every person in Congress come 2014. And get rid of the tea baggers holding the GOP hostage like terrorist... Because thats what these whackos are. Pure and simple.
Sep 18, 2013 6:22AM
The Fed has two problems... if it continues QE, it totally ruins business in America because it has grown fully reliant on infusions rather than pure effort... second and more importantly, all that cash is in the markets not coursing through the economy. When it leaves the markets it collapses them and will dilute all it gets invested in. Best for Ben to NOT do much but allow deflation of wealth spires... thus, a gradual tapering. Unfortunately it won't help the economy at all. Bernanke has created a premise for Depression far greater than post-1929.
Sep 18, 2013 8:48AM
Who really freaking cares what the FEDS do at this point, It's the biggest Circus in Town and everyone knows it. Not only is our FED trapped, so are the Global FEDS. They and Main Stream Media can talk about tapering but it will never solve the only Real Problem that was never solved and is still growing. Global Scam Derivatives.

Globally, the Scam Derivatives Markets are at the very least $500Trillion Dollars and some state it's at least twice that amount. These WMDs are clearly what froze up the Credit Markets and they are sole Reason the Global FEDS are printing to Infinity. However, there in no way in Hades they can EVER print enough fake money to account for phoney Digital Derivative Dollars.

What the Global FEDS can do, give the Illusion that everything is Fine and Dandy while giving the SuperRich ample time to Cash out Big Time before the inevitable Epic Global Collapse. And it will be Epic. Meanwhile, they sell you the BS of Buy and Hold to infinity. However, rest assured, the only answer the Global FEDS will offer in the end, One World Currency and One World Government. It's been their plan all along. And the World fell for it, Hook, Line, and Sinker.

Sep 18, 2013 9:08AM
The only real Question, will the FED ever surprise us and tell the freaking TRUTH!

For folks that think this Derivatives issue is Bogus, I suggest you look it up and read about it. Forbes has several Articles about it. Warren Buffet once called them WMDs. The Federal Reserve spent about $5Billion Dollars last year on Operations. That's a ton of cheese for such a Corrupt Organization to go thru. However, they do have a ton of Research available via the different Reserve Banks. The Cleveland FED site has a nice breakdown of the total Derivative Markets over time.

The article is titled, "Has the Over-the-Counter Derivatives Markets Revived Yet"
Authored by: Jian Cai
Google it...................

Sep 17, 2013 11:31PM
What if the Fed passes until their October meeting?
Sep 18, 2013 9:38AM

Housing starts won't matter....

Petroleum supplies won't matter.

Mortgage Apps. won't matter....


It's all about the FED today....

Sep 18, 2013 10:43AM
It's real simple:  If you want to crater the markets then all Bernanke has to say is he is halting or slowing down the QE.  If not, then he should not say anything in reference to QE.  There is more involved here than just wealthy investors.  There are millions of small to medium sized investors such as normal working folks with a 401k or an IRA that have their life's work tied up in those funds.  It never ceases to amaze me how some people act like the stock market is comprised mainly of just 'rich' people.  The majority of investors are just like you and me.  Simple working folks.  We all need to keep that in mind when passing judgments on how the Fed should react.
Sep 18, 2013 11:27AM

Classic Lady;Maybe today you can learn from my words of wisdom.As the Chinese say:"Experience

is not a kind teacher,but it is always a truthful one".

Sep 18, 2013 11:16AM
Mr. Fat cat:I wouldn`t go to a dog fight with you.
Sep 18, 2013 12:45PM
NO!!! They are going to help themselves , Wall street and the banks. The tax payers will pay for the trillions of dollars of money printing they have done. Get ready bankruptcy is coming. 
Sep 18, 2013 12:17PM

""Ideas are more powerful than guns. We would not let our enemies have guns, why should we let them have ideas.""
Sep 18, 2013 11:19AM
It's real simple then why is that? Why do folks have to rely on Markets instead of a JOB paying a living WAGE. Why can't folks rely on other investment other than manipulated stocks. It's fool Gold to rely on a manipulated Global Market forever. No person is prevented from taking profits in your individual investments. Of course that will differ on work related investments, depending.

Fact is, Corporations pushed out Defined Pension plans to 401Ks to trap the Middle-Class, that much more into their twisted games. And for the most part, we fell once again for their Fool's Gold. Once the illusion fades and the Reality of What it actually means to be in a Global Fiat System, there is a Major Price to be paid. But what a hell of a Ride it's been.

Sep 18, 2013 3:16AM

Federal Reserve Chairman Ben Bernanke should just stop talking and do what he needs to do.

Every time he steps to the podium and makes a announcement he causes trouble.  He should just

stop announcing what he is going to do.  It's like he is bragging about his job.  He is the cause of a

lot of the stock markets losses.

Sep 18, 2013 10:37AM
because I listened to all those financial wizards, the doom and gloom people, I loss thousands by not being in the market
Sep 18, 2013 10:03AM
Sep 18, 2013 12:37PM

"""I have never made but one prayer to God, a very short one

 He gave me you!!      LOL 
Sep 18, 2013 12:33PM

""IN general, the art of government consists of taking as much money as possible from one class of citizen to give to another""
Sep 18, 2013 12:41PM
Cut the cord Benny, Cut It. bring back the reality to Wallstreet and America, we have been living i a dream since 2007. Or are you waiting till the next president to crash the economy?
Sep 18, 2013 2:03PM
I hope those traders who manipulated the market are burned... they  are the cesspool of Wall Street.
Sep 18, 2013 12:55PM
The latest rumor is markets will jump at 2pm ..... traders, don't miss out ... really!!!
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