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The Fed, Noise, Volatility and Distribution


Ah... Fed rate decision day today. It's largely expected that they will keep rates unchanged at near zero and thus keep the punch bowl economy on its path to recovery. Liquidity in the economy and the asset markets has to be maintained at the expense of the US dollar and inflation (look at gold's move yesterday). At most, the Fed might change their communication to a more tightening stance. Quoting from the Wall Street Journal:

"Long before the Fed moves, it will need to communicate its intent to investors. The first step will be tiptoeing away from saying rates will stay low for an extended period. The communication strategy is likely to come up at this week's meeting, though it remains unclear when a change in the wording will happen."

But anyone expecting a clear direction in equity and asset markets to emerge from today's rate decision will be deeply disappointed. This is as liquidity is still driving market movements and the fundamental picture being anticipated by the market rally from the bottom is still developing. While it can be accepted now that the economy is recovering, nobody knows when the full recovery will come or how fast it will be. Neither the Fed, Geithner, Buffet, Goldman or any other expert knows.

What is certain for now while the fundamental picture (that of full economic recovery with Fed-concocted cocktails serving as a bridge towards this) comes into place, noise and volatility will be the name of the game given that markets have rallied so much and it is time for fundamentals to start backing up this rally from the March lows. Also take note that volatility, especially after the massive rally we've had, is a sign of distribution. For the first time, there is someone willing to unload their cheap shares to those catching up with the rally. This may lead to the healthy correction we need in equity and asset markets in general for us to resume our climb up the wall of worry.