Wednesday, September 18, 2013
Given the strong anticipation for a taper announcement, today’s relief rally should come as no surprise. However, the Fed’s inaction should be perceived by many as an admission that the economy is fundamentally weak. Once that possibility takes hold, today’s euphoria is likely to dissipate. Perhaps the Fed’s inaction may cause many to wonder if the economy is not as strong as they believed. This could ultimately lead to an even bigger sell off than what we would have seen today if the Fed had come through with a taper announcement.
A major factor in the current “recovery” is the confidence that has been created by rising stock and real estate prices. On Wall Street confidence can become a self-fulfilling prophecy. If the Fed were to make its fears more explicit that confidence could drift away. As a result, I believe that they chose a path of continuous obfuscation. But in so doing they lost control of the message.
The Fed knows that the appearance of economic health would evaporate if stimulus were withdrawn. But like Jack Nicholson in A Few Good Men, it also knows that the markets can’t handle the truth.