The Pendulum Shifts

By David Nelson, CFA

It’s no secret that there’s been a raging debate inside the Fed. Hawks like Fed Governors Plosser and Fisher have been quite vocal in recent months taking every chance to voice their concerns that the Fed was falling behind the curve. In previous Fed releases it’s the hawks that have taken a back seat voicing their dissent.

Yesterday, was a clear departure with Minneapolis Fed President Kocherlakata, a confirmed dove taking the dissenting view saying the Fed should promise to keep short-term rates near zero at least until inflation is forecast to reach 2% within one to two years, and it should continue the bond purchases. The pendulum is slowly starting to shift within the Federal Reserve.

End of QE

The end of QE certainly wasn’t a surprise to the street. The Fed announced the end of their controversial asset buying program and now sits on a balance sheet north of $4 Trillion. The eventual exit will be a subject of debate for years to come but for now let’s focus on what we learned yesterday.

The phrase “considerable period of time” when discussing accommodation is still there however they did upgrade their assessment of the job market saying “underutilization of labor resources is gradually diminishing.” 

Market Reaction


The Market’s reaction was swift. The U.S. Dollar took off followed by 2 & 5 year yields moving higher as soon as the release hit the tape. Stocks did their usual dance trying to find direction but ended up little changed on the day. Stock market reactions to Fed statements often take an additional 24 hours to develop. Today’s tape will be more telling. How we close will be a lot more important than the open.



I exited the remainder of our SPDR Gold Trust ETF (GLD) in Alpha Select portfolios shortly after the release. While we didn’t reach the stop I put forth in I Love Gold. I see little reason to stay in the position. A rising dollar and a more hawkish Fed lowers the probability that sentiment for the yellow metal will change anytime soon.



The Fed is attempting to move down a path toward normalization but there will be considerable debate as to just when we may see the first hikes. Earlier this year I penned several articles discussing a potential hike by the end of the first quarter. I’m probably going to be wrong on that call but for the first time in a while the street is moving closer to my view.

In recent weeks many, including yours truly were throwing in the towel on a 1st quarter or even mid-year hike pushing forecasts out to the 3rd and 4th quarter. Consensus seems to be moving toward a July time frame.

We’ll probably get a series of conflicting statements coming from a parade of Fed Governors but at least for now, the pendulum seems to be shifting to the Hawks.