I went fishing in Canada last week with a great group of guys. I was motivated to do my part on the night of our walleye feast, and after watching some YouTube videos on filleting I was sure I was ready to deliver.
The guys on YouTube make it look so easy, but filleting fish is an acquired skill and it took no time at all to cut a nice slice into my own finger.
The cut was a real gusher, but I was having too much fun with my friends. I ran inside, put on a little peroxide and a little iodine and four Band-Aids later I was back in action outside. I could deal with the cut later.
Well later turned into two days, and I wasn’t sure what kind of mess I would find when I pulled those bandages off.
This whole ordeal lent me some insight on what went on with Fed’s news conference following the Open Market Committee meeting last week. During the conference, the Fed Chairman reminded us someday the Fed would stop printing money to buy bonds and someday interest rates would go up. He told us someday wasn’t today and perhaps not even this year.
So I was surprised to see the stock and bond markets react so violently to what I perceived as a subtle reminder of the obvious during the news conference.
Immediately following those statements, the stock market sold off by roughly 5 percent, and the bond market by 2 percent, the financial market equivalent of severe thunder storm.
This market action left me wondering if I had missed something. Were these Fed programs so important even the subtle mention they would someday end should lead to a dramatic market tantrum? And if so what would happen when they actually ended sometime in the future?
The bandage on my finger led me in a different direction. Interest rates at zero and printing money to buy bonds are the macroeconomic equivalent of triage. Triage is designed to stabilize a patient until injuries can evaluated and more thoroughly treated.
The financial crisis of 2008 was the economic can be likened to a battle field level injury. Reactions to the injury such as the federal government’s 2008-09 stimulus plans and the Federal Reserve’s aggressive monetary policies of the last five years are the economic equivalent of triage.
What the Fed was really saying last Wednesday is someday it was going to pull back the bandage, someday we were “gonna have a look”.
I now view the market’s reaction as a cringe, which given my filleting I can relate to. Is our economy healing under the bandage? I think it is, but we all know how it feels when the bandage is pulled off.