Ever since the Fed began “tapering” quantitative easing, fears have morphed from misplaced terror over the taper to a similarly false fear over the fed-funds rate. So we guess it wasn’t surprising Thursday’s headlines remained fixated on the Fed’s word choices and editorial decisions, with speculation running rampant about what the deletion of “patient” and some dots meant regarding the timing of a rate hike.
(For our coverage of Wednesday’s decision, please click here.)
But as we’ve written time and again, trying to divine when a hike may come is unnecessary and impossible. Yesterday’s flip-floppy Fed illustrated that once this week. And the headlines in its wake put an exclamation point on it. (!)
Here is a roundup of headlines in the wake of the Fed’s non-action to illustrate these dueling takes.
Fed Removes ‘Patient’: Prepare for an Interest Rate Hike[i]
Patrick Gillespie, CNN Money
“The Fed dropped the key word ‘patient’ from its statement Wednesday, signaling that it could increase interest rates in June for the first time in nine years.” Well, to get technical here, it could raise rates at any point. Even in May, if they really wanted to and called a special meeting or conference call. It was never a requirement the Fed delete patient prior to hiking.
Fed Puts Interest-Rate Hikes in Play
Jon Hilsenrath, The Wall Street Journal
Fed Drops Patient Stance, Opening Door to June Rate Increase
Jeff Kearns, Bloomberg
Like the first, both these articles put hike timing at June. And both base it on Fed head Janet Yellen’s earlier comments that deleting patient “means the FOMC would probably wait at least two meetings before raising rates.” But Yellen initially said that a hike would come “on the order of around six months or that type of thing” after quantitative easing bond-buying ended. Six months would have been April this year. (We can't pinpoint "that type of thing.") Before that, the Fed’s guidance pointed to a 6.5% unemployment rate as the signal they’d begin considering a rate hike. We’ve been below that mark since March 2014. Fed commentary is unreliable.
Dovish Fed Whipsaws Financial Markets
Patti Domm, CNBC
But others now speculate[ii] a rate hike won’t arrive until September or October. “Many economists had expected a June liftoff date, but more had expected September. The fed funds futures suggest the odds of a first hike in October have increased.” A guy was quoted herein as saying, “They pushed out the timing of the hike to September. No one's thinking June now.” Well, no one except the preceding three articles, so we guess someone still thinks June is possible.
Yellen Sends Odds of Any Rate Increase Below 50% Until December
Liz McCormick, Bloomberg
Here yet more analysts weigh in after getting fancy and reading the fed-funds futures tea leaves, which they suggest show the probability of even a September/October hike is less than 50%. And before you presume fed-funds futures are all that predictive, please consider that as recently as Tuesday, the various futures markets were allegedly alluding to a better than 50% chance of a June or September hike.
Fed May Not Hit Neutral Until 10th Anniversary of Lehman Collapse
Simon Kennedy, Bloomberg
Now, this piece is moving waaaaaaaay past the initial hike and theorizing rates won’t hit 3.75%, which it claims is the “neutral rate”—a magical point at which GDP hums along without overheating or faltering—until 2018, a decade after Lehman failed.[iii] But for one, the Fed’s determination of a neutral rate is based on real interest rates—fed-funds rates less inflation, as measured by the Personal Consumption Expenditure Price Index Less Food and Energy. Unless one is projecting the combination of 0% core inflation and 3.75% fed funds rates, the March dot plot doesn’t discuss neutral rates. But what’s more, as the Fed wrote in 2004, “The difficulty policymakers face is that it is not obvious exactly what the level of the neutral real rate is. It cannot be observed directly. There is no reliable way to estimate it. And it can change.”
In its changeability, the neutral rate’s definition is similar to the Fed’s outlook. Our advice: Leave the speculation and guesswork over hike timing to the punditry. History shows rate hikes aren’t regularly problematic for stocks, and there is little to suggest it’s different this time. Take Ms. Yellen at her inconclusive word when she said Wednesday, “Just because we removed the word patient from the statement doesn’t mean we are going to be impatient.”
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[i] What does it mean to “prepare for a rate hike?” Does it involve buying a bugout vehicle? Or acquiring vast quantities of canned goods? Here is what it should not mean: taking some action with your portfolio, as there have been many historical rate hikes and they most often have little impact on stocks.
[ii] This is the right word. The Fed’s actions cannot be reliably forecasted, as they are not a gameable market body.
[iii] This point is actually not reached in the March 2015 dot plot until the undated “Longer Run” section of the plot, which would start at 2018 but is theoretically infinite. It is also extremely unlikely to be accurate.