Tags: El-Erian | stocks | Fed | statement

El-Erian: Why 'Dovish' Fed Statement Spooked Investors

By    |   Wednesday, 19 March 2014 06:43 PM

Ex-Pimco CEO Mohamed El-Erian has three explanations for why stocks fell and short-term interest rates rose Wednesday after a "quite dovish" policy statement from the Federal Reserve.

1. "Higher uncertainty premiums." El-Erian writes on CNBC.com that the Fed is going through two policy transitions. One is a switch from a direct instrument—bond purchases—to an indirect one—forward guidance on interest-rate policy. That raises "effectiveness questions," El-Erian says.

Second, the Fed is shifting from a quantitative guide for its interest-rate policy—the unemployment rate—to more qualitative judgments, El-Erian says. That raises "interpretation questions," he writes.

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2. "Technical market conditions." Given how much stocks have risen over the past five years, it doesn't take much to spur profit-taking, El-Erian says. "Similarly, over-extended front-end rate positions can be destabilized in the immediate term, even if the Fed is committed to maintaining low rates for long."

3. "Reaction to the interest-rate selloff." Stocks fell on back of the rise in short-term rates, because much of the economy, including the housing sector, is sensitive to those rates, El-Erian writes.

Experts say stocks also fell on comments by Fed Chair Janet Yellen and forecasts from Fed policymakers indicating that the central bank may raise rates sooner and by more than investors expected.

"The pace of tightening, once the Fed starts tightening, is a little bit faster than thought before, and I think that’s why we’re getting this market reaction," John Canally, an economic strategist at LPL Financial, told Bloomberg.

"Being reminded that the Fed will eventually raise rates is getting traders’ attention."

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Ex-Pimco CEO Mohamed El-Erian has three explanations for why stocks fell and short-term interest rates rose Wednesday after a "quite dovish" policy statement from the Federal Reserve.
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2014-43-19
Wednesday, 19 March 2014 06:43 PM
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