There is a real obsession afoot in the world. And, if it’s not about love, it must then be about money. More specifically, monetary policy.
Recently, the Fed’s Janet Yellen held a press conference to explain their widely-anticipated decision to remove one word – that is, patient – from their official policy statement on interest rates. Believe it or not, investors around the globe literally hung on a single word.
For the uninitiated, that might seem unbelievable. Yet, it’s true, one word from a central banker can drive the price of every asset around the globe.
With the elimination of the word, the Fed signaled that short-term interest rates will soon move above zero. To investors’ delight, Yellen also explained, given the weak start of the year, that the first rate hike might not start in June. With that, bets quickly shifted to their September meeting. And, both stocks and bonds jolted higher.
Now, let me note for the record that the difference between June and September is only three months. Why would any rational investor really care about a possible delay of ninety days? I know I don’t.
Beyond the obsession over ninety short days, there are three reasons I think the Fed is likely to remain very patient over the next few years.
First, the Fed’s short-term rate hikes – when they finally begin – will very likely be done at a snail’s pace. With interest rates having been held at zero for almost seven years – an amazing thing to write – a dangerous addiction to low rates has developed that will prove hard to break. If the Fed goes too quickly, I think the economy will feel it.
Second, since the last recession ended in 2009, the Federal Reserve has consistently overestimated the pace of the recovery. With the turn of each new year, they have anticipated better growth ahead, only to be disappointed by reality. It is happening yet again to start this year.
Third, the Fed recognizes that currency exchange rates are a difficult to control variable in a very complex equation for the global economy. While our Fed desperately wants to start raising rates, Europe, Japan and China are now doing the opposite. As a result, the US dollar has soared – and coupled with oil’s decline – is partly to blame for what’s expected to be the first decrease in quarterly earnings in the S&P 500 index since the recession.
After seven years of experimental and highly-accommodative monetary policy, the Fed’s air of invincibility is on the line. As silly as it is to ever focus on a single word, I am resigned to the idea that the obsession with the Fed may continue for some time to come. Now that, I must say, is really going to test my own patience.
March 2015 | Jason P. Tank, CFA
