An unexpected Fed meeting was called for today. Is the system at risk? Is policy about to be reversed? Markets, at least in early going, are roaring ahead! Are they pricing in an expected slap-down of current Fed policies?
Gold and, especially, silver are soaring. GLD up over $2.60 (1.7%) and SLV up around $1.30 (well over 7%). Markets in general are having an explosive up day with the DJI average up over 600 points!
At this point, markets seem to be expecting the Fed to blink. Here is Zerohedge’s take:
The stated purpose is a review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks. Based on last week’s events in the UK and the shrinking liquidity in US Bonds and the manifestation of that in crushed stocks, it is reasonable to believe a pause to rate hikes of some sort will be coming if not a Pivot itself.
It is probably equally possible that a more targeted aid will be implemented, either to help whatever is going on underneath the surface in US markets, or to (finally) open sort of dollar swap window for the EU and the UK. Any of this would be good for stocks, bad for inflation, and bearish for the dollar.
What is not obvious is the effect on US Bonds. If Bonds rally as one would expect under a QE (or end of a QT) environment then you have business as usual. Bonds could sell off however to the extent that the help is Europe and UK focused and investors pull money out of the US and put it back on the Continent.
Worst would be the US Bond market reacting like the UK did. That would be bonds getting crushed out of fear that there are concerns of credit here as well, and that fiscal irresponsibility without tight monetary policy could cause a crisis of confidence. This last one is highly unlikely for now, and if it did happen, the Fed would keep meeting until it “fixed it” like the BOE just did their own crisis.
This market ebullience may be short-term happiness for those long the stock market. They are not necessarily so for long-term inflationary considerations. The Federal Reserve is apt to be revealed as a bigger fraud than the (at least likeable) Wizard from the Wizard of Oz!
These are very dangerous times! The Fed is in danger of breaking things. Regardless of what they say or do, they are not in control of this situation. Market forces are much stronger than governments and central banks. In the long-term, they, not pompous officials, determine valuations. Be very careful in these extremely dangerous markets and times!