And Just Like That, The Market Rally Is Gone

After two huge stock market sell-offs, some traders were speculating that we could see a "dead cat bounce" today.

But so far, the bounce has been pretty unremarkable.

After trading up 100 points at the open, the Dow has lost all of its gains. All three major stock market benchmarks have gone into the red.

Recent volatility in the markets appeared to be triggered on Wednesday afternoon when Federal Reserve Chairman Ben Bernanke suggested that the Fed could soon begin to taper, or gradually reduce, its extraordinary stimulative bond-buying program, aka quantitative easing.

For those who missed it, here are Bernanke's exact words:

"Going forward, the economic outcomes that the Committee sees as most likely involve continuing gains in labor markets, supported by moderate growth that picks up over the next several quarters as the near-term restraint from fiscal policy and other headwinds diminishes. We also see inflation moving back toward our 2 percent objective over time. If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear."

These comments were immediately followed by a surge in interest rates and a collapse in the stock markets, two trends which appear to be continuing into today.

The 10-year Treasury yield is currently at 2.5%, the highest levels since 2011.

In an unprecedented move, the St. Louis Federal Reserve published a statement this morning articulating the concerns of Fed President James Bullard, who disagreed with how Bernanke communicated tapering.

President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed.  The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store.  President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.

In addition, President Bullard felt that the Committee’s decision to authorize the Chairman to make an announcement of an approximate timeline for reducing the pace of asset purchases to zero was a step away from state-contingent monetary policy.  President Bullard feels strongly that state-contingent monetary policy is best central bank practice, with clear support both from academic theory and from central bank experience over the last several decades.  Policy actions should be undertaken to meet policy objectives, not calendar objectives.

It's still early in the day.  Maybe things will turn around.

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