There. I said my piece in the headline.
While many have been parsing through the Fed statement or Chairman Jerome Powell's post-meeting press conference looking for clues, it did not take much for me to figure things out. Of course, the recent Fed speeches and testimony comments were a good way to tip their hand. So, just what did they say that has roiled markets?
Let's step back first and look at the price action, which had been abysmal leading up to the Federal Open Market Committee (FOMC) meeting last week. Even on Fed Day last Wednesday, the Nasdaq was getting punished, bringing the index below its 50-day moving average for the second day in a row. When the statement and subsequent news conference occurred the bulls snapped off a sharp two-hour rally, closing near the highs of the session.
The Nasdaq performed well, dragged higher by the other indices, but the next day lost it all and then some. After rising 2%, the Invesco QQQ Trust (QQQ) (Nasdaq 100) fell more than 2.5%. Volatility is here to stay!
What in the Fed statement could be making everyone feeling nauseous?
First, the Fed announced it was accelerating the taper of bond purchases, hoping to wrap it up by March.
Next, it signaled a distaste for the latest inflation readings, and why not? They were the highest readings for the Consumer Price Index (CPI) in more than 40 years and the highest gains on record (9.6%) for the Producer Price Index (PPI).
Consumers have been feeling the squeeze of higher prices caused by many issues, starting with the supply chain problems. Those issues will eventually be addressed, but at what cost? Recently, Chairman Powell stated that "transitory" inflation is not happening any longer. We must surmise he believes inflation will be more permanent, which is nothing to celebrate.
In addition to the taper, the committee is set on hiking rates, much more and much sooner than previously expected. Those hikes eventually will put pressure on bonds, but for now the equity markets are going to be re-priced. What does that mean, exactly? Simply put, the earnings yield, while high under a zero interest rate policy, will eventually be adjusted lower, and the market multiple as well.
This has nothing to do with the strength or health of the economy, which seems fine. But higher interest rates, even from a lower base, are going to be a headwind to markets as liquidity dries up. As mentioned prior, the Fed has changed the game. We need to adjust to it.