Mercurial Fed

"Why The Markets Are So Mercurial", the jist of it.

In Business Week:

There's plenty for investors to be nervous about these days. Threats from Iran about cutting off oil supplies and the onset of hurricane season could send energy prices up again. Corporate profits are slowing. The dollar is weakening. But never mind all that. What traders really fear is the Fed. (...)

...don't think for a second that the Fed has lost its ability to affect global markets. On May 10 it raised the benchmark federal funds rate a quarter-point to 5%. Its policy statement contained the most direct language yet that inflation remains a concern and that the Fed might keep raising rates to quell it. Since that day, the Standard & Poor's 500-stock index, the Dow Jones Euro Stoxx 50 index, the MSCI emerging markets index, and many commodities markets have fallen sharply, with the worst wreckage overseas. At the same time, volatility measures have spiked.

Why are traders so twitchy? History. When the Fed starts raising rates, it rarely knows when to stop.

(...) And so the markets cling to the official pronouncements. The biggest: Bernanke has said that the Fed's course will be driven by economic data as they emerge. As a result, stocks have been rising and falling largely in unison based on the macroeconomic numbers of the day, with company fundamentals taking a backseat. ...And yields on 10-year Treasury bonds, the chief gauge of economic expectations, have fallen from 5.19% on May 11 to 5.02% by June 7. That means that traders are beginning to see weakness ahead.