The Blog

The Punch Bowl Remains

Posted on March 16, 2016

The Punch Bowl Remains

Posted on March 16, 2016

The Fed keeps rates unchanged and the market responds accordingly. Apparently, the Punch bowl is yet to be taken away.

The title of this piece refers to the common metaphor that the Fed's easy money policy [typically, low interest-rates] is similar to a host of a big party keeping the spiked Punch bowl out too long thus, neglecting their duty to keep the party from going awry...which is historically proven of what occurs when interest-rates are kept far too low for far too long. 

Keeping rates unchanged further extended the marketís confidence in a risk-on moment. This was confirmed as bulls pounced on equities across the board as well as commodities. Oddly, 10 Yr. Treasuries rose but to no avail. Theyíre in the midst of a short-term downtrend testing support. Conversely, yields fell and the dollar followed. Gold, the anti-dollar trade in this case, rose.

The ten minute charts of these markets show the reaction.


So what did the market just tell us?

The Fed is keeping rates unchanged thus itís still a risk-on moment as equities are bid-up along with commodities. The knee-jerk reaction of Treasuries being bid-up sank yields which the dollar followed. Remember, the Fed is keeping the volatility at bay on the heels of the ECBís rate cut last week along with Japanís rate cut in January. Interest rate cuts into negative territory are warning signals due to the reason behind them: our weaker-than-expected-global-demand-environment.

Isnít Ďrisk-oní a good signal?

Yes and no. Yes, because it allows the market a moment of optimism that its expectation of an unchanged rate-hike proved correct. On the other hand, ĎNo,í because the longer the Fed waits to raise rates the longer itís keeping the punch bowl out instead of taking it away as it should. Usually, this portends to the party getting a bit out of control after mid-nightÖbecause, as my dad used to tell me, nothing ever good happens after midnight.

Jos. G. Sellery