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The members of the most powerful financial body in the world U. Federal Reserve Committee are spending hours on end obsessing over two words: You can read the minutes from the last FOMC meeting here for yourself. Any indication of a shift in this policy has made the markets very unhappy, thus requiring a quick dovish fix to satisfy the needs of the easy money addicts.

What did they mean by financial conditions and how would removing two words from a statement have such a negative effect? Perhaps they are they referring to the Chicago Fed National Financial Conditions Index which measures risk, liquidity and leverage. How could they claim to be concerned about a tightening of financial conditions when financial conditions were about as loose as we have ever seen?

The economy was one year into its expansion and approaching the point where in every prior post-war cycle, the Federal Reserve would start discussing an imminent tightening of monetary policy. Fed officials responded to the stock declines by coming out with dovish statements and emphasizing the weakness in the economy.

The economy continued to expand and by April market participants were once again anticipating a tightening cycle to begin within the next year, with an expectation of the Fed Funds rate moving to over 1. Twist would be announced in late September and by early October the Fed Funds Futures had completed shifted.

On this commitment to easy money, stocks pushed higher once again into the end of and early Dovish commentary from Fed members ensued in response to this decline, with Twist being extended in June. By early July expectations for the first rate hike had been pushed out until the middle of , nearly three years into the future. In late June, near the end of the stock decline, Bernanke reassured market participants that a reduction in purchases was not imminent and that rates would continue to stay low for a long time regardless of any tapering.

The equity market sold off in January with the start of the tapering but quickly recovered. In March, the Fed was forced to drop its 6. The large cap indices surged higher on this dovish news and were trading well into early September.

The small cap indices, however, were beginning to struggle mightily, diverging from their large cap peers. In early September, the futures market was expecting the first rate hike to begin around the middle of Expectations on the Fed Funds rate were already shifting out by this point green line. But it was not enough and the market continued to fall.

Which brings us to today. It has been a month since the end of QE3 and the attention has shifted to the first rate hike. Why is the market so obsessed with these two words? Is this rational behavior? Simply, the market is obsessed with it because the Fed is obsessed with it. Well, the futures market is currently expecting the first rate hike to occur in July But as we know, whether that rate hike actually occurs in July is dependent entirely on the direction of stocks between now and then.

But as we have seen over the past few years, if there is any stock market weakness between now and then the playbook is as follow: In short, the stock market tail wags the Fed dog.

Is this a good idea, letting short-term stock market movements dictate monetary policy? This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.

The information contained in this writing should not be construed as financial or investment advice on any subject matter.

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Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation. Bilello holds a J. He is a Chartered Market Technician CMT and a Member of the Market Technicians Association.

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