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Monetary Policy was Not Changed and Many Regard the Post Meeting Statement as “Ultra-Dovish.”

Monetary policy was not changed and many regard the post meeting statement as “ultra-dovish” even as the domestic economy reaches full employment by definition and the FOMC increasing its 2015 growth and core inflation forecasts.

The odds of a change in October or December are about as volatile as the equity reaction to the outcome of the meeting.  At the time of this writing, Fed Funds Futures, which are only a gauge of market sentiment, are now suggesting an 17% chance at the October meeting and a 44% chance at the December gathering.

Commenting about equity market reaction, the volatility following the announcement should now convince all the markets have been hijacked by the machines.  Several weeks ago I opined most are on an unleveled playing field where the odds are stacked against the typical investor.

Wow!  What a sensationalist comment to reiterate.  I am even more convinced this dictum to utilize speed and disparity between the numerous newly created markets places for “best execution”  is perhaps one of the worst ideas the regulatory officials have conceived.  This is a classic case where the “cure” is worse than the disease.

The specialist system which historically had taken risks to maintain market order has all but been abandoned and replaced by technology, technology that is not required to play by the same rules of many market participants thus increasing volatility.

Writing rhetorically, conjecturally and cynically, which is code for there is absolutely no attribution as to what I am going to write, did the Fed delay raising rates fearing an outsized impact on the markets, partially the result of high frequency trading (HFT) utilizing “recent financial and economic developments abroad may restrain economic activity somewhat” as an excuse? 

The Central Bank will not and cannot use domestic market volatility as a stated reason for delaying action.

Last week I referenced a CNBC interview of a top SEC official stating HFT/ETFs are having an outsized impact upon trading.  Moreover, much to my surprise the same official commented the full implementation of the Volcker rule is adding to this volatility given that no one really understands this rule.    The official stated that changes have to be made to make a more level playing field and greater regulatory transparency.

Could I remotely suggest the FOMC did not act fearing a possible bloodbath given that interest rates are a major component of HFT algorithms, a bloodbath amplified by the Volcker Rule?

Is this too conspiratory or Oliver Stoneish?  Based upon my firsthand experience during the last 12 months, no.  Unfortunately I have been involved in some situations where life is stranger than fiction, situations that even the best of Hollywood writers could not envision.

Enough of the unfounded speculation, what will happen today?  Will there be any reaction to the LEI?

Last night the foreign markets were down.  London was down 1.05%, Paris down 2.33% and Frankfurt down 2.72%.  Japan was down 1.96% and Hang Sang up 0.30%.

The Dow should open moderately lower as the Fed’s dovish statement regarding global growth has elevated fears.   European stocks and the dollar fell while emerging markets rallied. The 10-year is up 12/32 to yield 2.15%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.