I would argue that there are four notable behind-the-scenes trends that suggest a monetary-policy mistake is being priced into the market.
1. The extraordinary demand for durated fixed income: 30-year yields are down nearly 50 bps in 2014.
2. The rise in short-end yields: 3-year yields have risen 15 bps in 2014.
3. The sharp recovery in EM: EEM has rallied 8 percent in the last 6 weeks while spoos have gone nowhere.
4. The sharp outperformance of value stocks to growth stocks: IBB is down 18 percent in the last 6 weeks while IBM is up 6 percent.
The market is beginning to price in the risk of a policy error from the Fed. And with the communication mishaps from Janet to start her tenure, it is hard to blame people for being nervous. The FOMC should be very concerned by the 50-bp drop in 30-year yields in 2014. This is a sign that the market sees the FOMC as acting more like the “old” BoJ (or, sadly, like yesterday’s BoJ). That said, I have exactly the same confidence I have always had that the Fed will come through with reflationary policies over deflationary policies. Janet is dove! Stan is a dove! Billy D is a dove! The market has freaked out over a few bumbling errors in communication. Misperceptions will be fixed in time (like in today’s minutes), and the risks of a deflationary shock will be priced back out of the market