January has been a month marked by the market’s adjustment to a shift in the Fed policy outlook.  This began right at the outset and resulted in higher rates and lower stock prices.   Why? Last week’s commentary goes into great detail on the matter.  Revisit it HERE. This week merely served to confirm what we already knew , namely that the Fed would not be making any policy changes this week, but that it would do nothing to push back on the expectation for policy changes at the next meeting.   Language was added to the announcement to suggest a rate hike at the next meeting, and there was no change to the pace of tapering (which will be concluded before the March Fed meeting).  Last but not least, Powell said the Fed remains on track to begin trimming the balance sheet as early as the June Fed meeting–perfectly in line with our previous assumptions. Stocks and bonds get a bit cranky when the Fed yanks the proverbial punch bowl away–even if they knew it was coming.  Fortunately, they’d prepared quite well for this week in terms of trading levels.  Sure, there was a bit of a volatile reaction at first, but the next 2 days of trading confirm that the Fed didn’t truly surprise the market (i.e. volatile trading with rates and stocks ultimately making it back near pre-Fed levels). In the slightly bigger picture, we can see the damage that’s already been done (and the possibility that big stock losses have helped rates avoid bigger spikes).
Source: Mortgage News Daily