NEW YORK (TheStreet) -- Unexpectedly the Federal Reserve didn't reduce its bond-buying program last week, causing wild price swings and adjusted expectations for financial markets.
Initially, assets spiked, but then investors seemed to think that prices were too high and they wondered about Fed Chairman Ben Bernanke lack of clarity about future policy.
Bernanke's guidance in May about slowing bond purchases, along with many Fed board members public comments since then on tapering, led investors to believe the Fed would cut stimulus to some degree at the Federal Open Market Committee's meeting last week. That did not happen and now investors feel somewhat deceived.
The first chart below is of SPDR S&P 500 Price (SPY). The Fed's stance last week led to a spike to record highs in equity indexes as bond purchases are to continue indefinitely.The positive reaction may be finished, however, as the debt ceiling situation looms and uncertainty surrounding the future of the Fed's policy could push equity indexes back down to support lines over the next few weeks. (TIP). Inflation-protected securities have come into favor as the Fed's decision to keep pumping money into the economy raises concern over future inflation. The price action below shows that prices of Treasury Inflation Protected Securities have traded within a sideways pattern since mid-June. In May, investors believed that the Fed stimulus program was on its last leg, which led to a selloff of inflation protection such as gold and bonds as interest rates trader higher.
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