HT Commentary – Losing Patience?
On March 18, 2015, Janet Yellen, Chair of the Federal Reserve and the Federal Open Markets Committee, released a statement that included in the following:
“The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.”
Alright then, I get it. No rate changes yet. Thanks for the information.
Then my email blew up. Some financial news services were sounding alarms, others were encouraging calm. Wait a minute, what happened, did I miss something? I took a quick look at the markets and stocks were rising, not falling. I re-read the Committee’s entire statement and compared it to prior statements. Ok, still confused, what’s up?
It turns out that all the fuss was about one word that was missing from the Committee’s statement. The Committee had excluded the word “patient” from the March 18, 2015 guidance. The Committee’s previous statement released on January 28, 2015 including the following:
“Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.”
Did ‘losing patient’ mean that the Committee was signaling a rate increase in the near term? Why were the markets reacting favorably? In the days that followed I learned new terms like “dovish” which is how some were describing the Committee’s statement. While the Committee removed the word patient from its guidance, they were also telling us that the economy was only moderately improving and any rate move would be gradual. In other words, the Federal Reserve was “dovish” about the economy and not ready to do anything drastic.
A few months ago, everyone was trying to figure out what considerable time meant (through 2014 the Committee had used considerable time to describe the eventual rate increase). It was only recently that the Committee replaced considerable time, with patient. Now I’m losing patience.
Why do we pick words apart rather than try to understand the fundamentals of the economy? Do we have to be spoken to like children, hanging on every word? Unfortunately yes, we probably do. The market is the market – investors bigger than us listen to every word, not only responding to fundamentals, but also anticipating market behaviors. But if we learned anything from the Great Recession, we need to understand the fundamentals better. I would like to hear more from our experts about how energy, housing and international developments factor into the Federal Reserve’s rate discussions, and less about a word or two in a statement or speech.
Soon after the Committee released its statement, Ms. Yellen told reporters “Just because we removed the word patient from the statement doesn’t mean we are going to be impatient“. Love that.