Six things to know about the market reaction to the Fed - BBG

Mohamed A. El-Erian, a Bloomberg View columnist and the chief economic adviser at Allianz SE, came out with a piece illustrating six key things to know about the Fed policy responses from markets.

Key Quotes:

“Before the Fed announcement, some traders were positioned for a more aggressive upward revision in the “dot plot” that shows Open Market Committee members’ expectations for the path of future interest rates. In the event, the Fed kept the 2017-18 rates guidance unchanged.” 

“This dovish spin to the rate hike sent shorts scrambling to cover their offside bond positions. The resulting generalized downdraft in yields on U.S. Treasuries gave stocks a further push up, while strengthening hope that the Fed could deliver a “beautiful normalization” of rates.”

“Going forward, all this will boost the Fed’s policy confidence as it gradually transitions its policy regime beyond data dependency, and as it feels more comfortable about leading markets rather than following them.” 

“This gradual convergence will be reinforced by what is likely to be a policy shift in the Fed’s balance of risk assessment in the next few months.” 

“The prospects for such policies will influence more than the Fed.”

“All this leaves investors with a more complicated portfolio proposition now that stock indexes have rallied significantly and the lagging sectors (such as tech and emerging markets) have been playing catch up.“