“‘Considerable time’ is about yea big, so you know, we’ll hike in about 12 inches worth of time,” is not what Janet Yellen said at this moment in today’s press conference. Photo by Alex Wong/Getty Images.
It’s Fed Day, folks, and after months of speculating, the FOMC finally removed the phrase “considerable time” from sentence four of its policy statement’s paragraph on interest rates … and moved it to sentence five. (Then they gave you some wishy-washy econo-gobbledygook that Harry Truman would hate.) Instead of pledging to keep the fed-funds target rate near zero for a “considerable time” after quantitative easing ended, they believe they “can be patient,” which they say is “consistent” with that previous “considerable time” thing. Whew! Stocks jumped and headlines went into speculative overdrive, but we wouldn’t make much of it at all—it’s just evidence Fed head Janet Yellen is getting good at using a lot of words to say a lot of nothing, just like her predecessors. None of it tells us when rates will rise.
Yellen kicked off her post-game presser reiterating that fundamental point: “This new language does not represent a change in our policy intentions and is fully consistent with our previous guidance.” In other words, only the marketing spin changed.[i]
Folks have long fretted the removal of the “considerable time” assurance, believing it starts a six-month countdown to this cycle’s first rate hike. It actually does no such thing—the Fed has always said the rate hike will depend on data. What the numbers look like at any given time and, more to the point, how the cabal of humans at the FOMC chooses to interpret them. If inflation and growth are galloping come February, they might hike then! If inflation is well under target and growth modest mid-year, they might hold off in hopes things get cooking later on! There is just no way to know, ever.
The whole six-month thing was a myth from day one. It started at Yellen’s first quarterly press conference after she took over from Ben Bernanke, before she had learned the art of Fedspeak—talking in unintelligible riddles that mean nothing but sound like something Yoda would say, which people like because wise, Yoda is. Alan Greenspan perfected that trick, and Bernanke happily ran with it, but Yellen took a few months to get up to speed on her technobabble. When asked what “considerable time” meant in March, when it first appeared, she said: “So, the language that we use in the statement is ‘considerable’ period. So, I—you know, this is the kind of term—it’s hard to define. But, you know, it probably means something on the order of around six months or that type of thing. But, you know, it depends.”
By June, she had wised up a bit: “So what I want to say, the guidance that I want to give you, is that there is no mechanical formula whatsoever for what a “considerable time” means. The answer as to what it means is, it depends. It depends on how the economy progresses.”
And in September, she was gloriously nebulous: “I do not think we have any mechanical interpretation that applies to this. It, of course, gives an impression about what we think will be appropriate, but there is no mechanical interpretation. … And it is important for markets to understand that there is uncertainty, and this statement is not some sort of firm promise about a particular amount of time.”
Today’s presser is still going as I write, but the live blogs indicate she is noncommittally obfuscating once again, bless her heart. “The committee considers it unlikely to begin the normalization process for at least the next couple of meetings.” But, “This assessment, of course, is completely data dependent.” Though, “a number” of Fed people think “conditions could be appropriate by the middle of next year” to hike, but again, “there is no preset time and there is a range of views as to when the appropriate conditions will likely fall in place.” And for good measure: “No meeting is off the table.”
So yah, that is a lot of words that amount to a simple “Who the heck knows? We sure don’t!”
Seems about right.
Don’t read much into any of this—or that little paragraph at the bottom of today’s statement noting three members’ dissent. That’s all just meaningless posturing too, with three outspoken regional Fed presidents who’ve long been critical of the Fed’s overall approach voicing their displeasure for the umpteenth time. Dallas Fed President Richard Fisher thinks they should be more hawkish. Minneapolis Fed President Narayana Kocherlakota thinks they should be more dovish. Philly Fed President Charles Plosser wonders what all the fuss over two words is. And oh by the way, Plosser is retiring in March, and Fisher must step down by April 30. Kocherlakota won’t be a voting member next year, as the regional Fed Presidents rotate in and out of the FOMC. So these fellas won’t even be around for most of the actual rate hike debate.
Bottom line: The Fed will hike when it hikes. Sorry for the tautology, but it’s true! They will evaluate whatever numbers are in whenever they meet, they’ll vote, and at some point, they’ll probably hike.
What happens then? Markets judge whether it was appropriate or not. We’ll cross that bridge when we come to it, but it’s hard to imagine an economy growing above its postwar-average growth rate for four out of the last five quarters being unable to handle rates above zero. Plus, history shows markets have done overall fine after the first hike in a tightening cycle (Exhibits 1 and 2). The yield curve spread is plenty wide. Loan growth is rising. Money supply is growing. So do yourself a favor, tune out the chatter, and enjoy your holidays.
Exhibit 1: Rate Hikes and the S&P 500
Source: FactSet and US Federal Reserve, as of 7/15/2014. S&P 500 Price Index, 12/31/1970 – 12/31/2006.
Exhibit 2: Rate Hikes and the MSCI World Index
Source: FactSet and US Federal Reserve, as of 7/15/2014. MSCI World Index, 12/31/1970 – 12/31/2006.
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