“Analysts will be hard pressed to explain how equity markets ended unchanged on the day of an unprecedented policy announcement from the Fed,” El-Erian begins, in a piece for CNBC. “Rather than resort to clichés, they could consider the competing emotions felt by a patient taking an experimental drug that has not been through clinical tests. Let me explain.”
The “expected and therefore fully priced in” excuse for an unchanged market does not work, he argues.
“A notable component of today’s Fed announcement–the shift to quantitative (employment and inflation) thresholds–was a surprise. Most had expected this would not occur until March 2013 at the earliest; and the few outliers had mostly opted for January.”
The second traditional explanation he targets, compensating news, “also does not work. Away from the Fed, it was a relatively quiet day.”
So what’s going on? What accounts for the eerie silence?