With the markets, and the U.S. economy, so dependent on the flow of cheap money stimulus from the Federal Reserve, each and every one of its policy statements, meeting minutes and press conferences gets analyzed to the nth degree for hints about what's in store.
It was the same story on Wednesday as the market reacted to the first policy announcement and Q&A session led by new Fed Chair Janet Yellen. And it's clear that she created some disappointment.
Expectations heading into the day were for Yellen to sound a dovish tone by promising a continuation of cheap-money policies (by promising to hold short-term rates lower for longer) even as her committee pulled the ongoing QE3 bond purchase program back by another $10 billion per month.
Despite the fact that the unemployment rate has fallen near levels that the Fed had previously fingered as being associated with short-term interest rate hikes, it was widely expected that Yellen would move the goalposts, ditching the so-called quantitative "forward guidance" for a more qualitative framework.
That's largely what happened. But the details revealed a more hawkish tone from Yellen. And stocks dropped hard in response.
For one, in not backing off its tapering program, the Fed appears to be dismissing the latest slowdown in economic data -- the most severe since 2012 -- as more connected to the bone-chilling winter weather than a weakening economy. The Fed isn't alone: company after company has blamed disappointing earnings results on the snow and ice. FedEx (FDX) is just the latest example of this.
In its policy statement, the Fed highlighted its belief that "there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions."
Time will tell. But the severity of the slowdown, and the fact that it's continuing into March, suggests deeper trouble.
Second, the Fed's confidence isn't reflected in its economic growth forecasts. Its forward GDP growth estimate ranges for the next three years were lowered and narrowed across the board. The Fed now sees 2014 GDP expanding in a range of 2.8 percent to 3 percent (down from 2.8 percent to 3.2 percent previously).
The fact that Yellen kept tapering amid a slightly less rosy economic outlook and the ongoing disappointment in the economic data didn't exactly comfort the cheap-money junkies on Wall Street.
And finally, during her press conference, she let it slip that she expects the first short-term interest rate hike to come in the early part of 2015 -- sooner than the market had anticipated.
Remember last year's "taper tantrum"? Long-term interest rates nearly doubled from 1.66 percent last May to nearly 3 percent in September merely on the suggestion that the Federal Reserve was about to start dialing down its ongoing bond purchase stimulus. Never mind that short-term interest rates have been held near zero percent since 2008. Or that the taper of "QE3" merely represented a slowing of the pace of new stimulus -- not a tightening of policy or even holding it in neutral.
The market remains extremely sensitive to the perceived path of Fed policy. And in her first appearance on center stage, Yellen's hawkish tone sure rattled a few cages.
The U.S. dollar was the big beneficiary, which in turn put additional pressure on emerging market assets. Strength in the dollar was responsible for the turmoil in emerging market currencies back in January, so watch for this to recur.
Disclosure: Anthony has recommended FXP to his clients.