Fed times pep talk to stop wild week of market swoons

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Futures pushing higher this morning and stocks around the world stabilizing after a crazy week. Talking-class market watchers are attributing the rally off market lows yesterday to comments St Louis Fed President James Bullard made on Bloomberg TV.

About an hour into the trading day Thursday, with the S&P 500 (^GSPC) at its lows and the smell of fear in the air Bullard took the mic and had his Battle of Agincourt “Once more into the breach…” moment.

Jame Bullard, President of the Federal Reserve Bank of St. Louis said given the wild market the Fed might not finish tapering as quickly as they had intendedJame Bullard, President of the Federal Reserve Bank of St. Louis said given the wild market the Fed might not finish tapering as quickly as they had intended
Jame Bullard, President of the Federal Reserve Bank of St. Louis said given the wild market the Fed might not finish tapering as quickly as they had intended

“We have to make sure that inflation expectations remain near our target,” said Bullard in reference to the FOMC’s ongoing war against deflation. “And for that reason, I think a reasonable response by the Fed in this situation would be to…. pause the taper at this juncture.”

Just like that feverish selling broke. Bullard’s stirring cry to non-action ringing in their ears, traders began furiously bidding for shares. Yes, a non-voting Fed board member’s oblique reference to the possibility that the Fed may not completely eliminate its now $15 billion monthly QE program this month marked the lows for the correction thus far.

How big was Bullard’s bluster? Based on the World Bank’s estimate of the total market capitalization of US stocks the 2.5% gain in equities just in the States is worth about $420 to $450 billion.

We knew the Fed would blink on coming up with a new QE at the slightest excuse. Peter Schiff and I discussed it openly last week. We just didn’t know their pain threshold. How bad would it have to get before the Fed stepped in? Now we do. Whether he tried to or not James Bullard has in effect signalled to traders that the FOMC is committed to jawboning the equity market anytime stocks get down 9% or more.

The market surged higher after James Bullard's comments
The market surged higher after James Bullard's comments

If that seems absurd to you it’s only because you haven’t been paying attention. The Fed’s commitment to transparency means everything they say is taken as gospel. The perceived leverage of the Fed is such that Bullard got 30 months worth of QE priced into stocks just by suggesting they may pause the taper here.

Was it enough? Probably not for the long term but it was good enough for now. After the last few weeks most traders are ready to call today even and head for the exits.

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