Dow Jones Industrial Average round-trips a Fed that promised nothing

The Federal Reserve chair's speech, a lengthy address with no forward guidance or reaction function, failed to reassure markets and led to a significant move in the Dow Jones Industrial Average. With odds of a quarter-point increase rising to over 55%, the Dow printed a low of the day before climbing to first look above 53,800 since mid-month.

The Fed chair described the economy as resilient and the labor market broadly consistent with full employment, while noting that recent economic data had been better than expected. However, the speech left out key details about potential moves by the Committee and did not set any numerical thresholds. The market reacted to the absence of clear direction, pricing the Committee's tone rather than any specific policy changes.

The speech also failed to address the Treasury operation that doubled the ceiling on longer-dated buybacks and the fiscal authority, which the chair had previously criticized. The market's response to the speech suggested that the front end of the yield curve still belongs to the Federal Reserve, while the back end now belongs to whoever is buying the bonds.

The equity market's reaction was less decisive than the positive session would suggest, with the Dow printing a low and initially falling before recovering some of the losses. The week still ended higher, but the Dow was still 2% below its record set on August 5 and had been capped for three consecutive weeks. The next major economic data point, August payrolls, is scheduled for September 4, and the Federal Open Market Committee's decision is expected on September 16.

Until then, the only guidance available is the economic data itself, which is the design of the meeting.