The recent turmoil to rock markets globally may well be one of the great mysteries that will be looked into for cause and discussed at length for many months and perhaps years to come.

From my perspective I have not found any obvious evidence that points to monetary policy as being the source of volatility this time around, which is one of the first signs of encouragement I’ve noted since becoming occupied with Fed-watching (and to some extent the ECB, BOJ, and BOE too). I’ve checked the websites of most central banks in the West for clues including the operations section of the NY Fed’s site, and I have scoured popular news sources for any recent plausibly credible hawkish central banker gum-flapping and have come up empty-handed.

The only notable item I have found in the press is that on Friday, February 2, an article appeared on Bloomberg.com asking whether the Fed’s inflation target is kaput that contained information about an ongoing discussion of alternatives at the Fed, the same day markets started making dramatic southward moves; although looking at the 1M graph of the DOW, the last high was on January 26. Among other things going on that day was the release of the FISA abuse memo, and release of US employment data for January showing an unchanged rate of unemployment and a 3% yoy wage increase, the largest such increase since the onset of the Great Recession.

An item complicating my research is the fact that I have not been monitoring Fed funds rate futures to detect whether markets took the employment news to mean a more aggressive schedule of Fed rate hikes ahead. Though the TIPS spreads have increased to just above 2% across the spectrum from 5-yr on, which would seem to conflict with the direction markets have taken; and market interest rates appear to agree with TIPS. WTI also has not seen much impact and would likely be taking somewhat of a wild southward ride if demand issues were apparent.

I’ve read many financial news reports attributing the market turmoil to rising market interest rates and inflation expectations, but that explanation doesn’t really make sense to me because market prices would adjust to the expectation if inflation were the driver – unless, of course, I am just a hopeless noob without a clue, which is entirely plausible given my difficulty making sense of what is going on and the fact that it has gone on nearly unabated for a week.

Together with the knowledge of US tax code changes coming into effect that is likely to impact investment behaviors, it looks like it could have more to do with reallocation choices and probably isn’t anything to be gravely concerned about. I don’t have a crystal ball handy, but would venture a guess that the recent volatility will level off soon and probably recover to some degree to be in line with rising inflation expectations. As always, however, this is contingent upon what sort of news comes out the Fed because it has a rather uncanny knack of complicating matters that are likely best left to work themselves out.

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