Last Friday, at global central bankers’ annual confab in Jackson Hole, Wyoming, the world’s monetary luminaries caught the world’s attention by … dressing in plaid, bolo ties and Wranglers for a “western themed” dinner. Oh, and Fed head Janet Yellen delivered a speech called “The Federal Reserve’s Monetary Policy Toolkit: Past, Present and Future.” Given Yellen’s past penchant for puns, we hoped she’d detail how low inflation put a wrench in their plans to normalize monetary policy, or what tricks they could use to hammer inflation in the future, or maybe just drill down on the finer points of the triparty repo market—but alas, it was not to be. The rest of the world, however, got its wish: more jawboning about the next rate hike. Four days on, pundits are still trying to read the tea leaves. We wouldn’t bother, however: Overrating central bankers’ comments is a recipe for investment errors. Not only do markets not have any set relationship with Fed moves, but Fed people have a long history of doublespeak and flip-flops.
Most of Yellen’s speech was an interesting, if academic, discussion of how the Fed is able to guide interest rates when its balance sheet is so bloated—no small feat. But Fed technical discussions are for nerds (like us), so the media glazed over it and dwelled on her interest rate commentary, in which she expertly played the role of a two-handed economist: “Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook. And, as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course. Our ability to predict how the federal funds rate will evolve over time is quite limited because monetary policy will need to respond to whatever disturbances may buffet the economy. In addition, the level of short-term interest rates consistent with the dual mandate varies over time in response to shifts in underlying economic conditions that are often evident only in hindsight.”
To us, the most notable thing about this passage is that Yellen finally mastered the art of Fedspeak—using a lot of words to say nothing, or at least nothing new. This is no small feat for a person whose earlier communications set oddly specific timetables for rate hikes—timetables the Fed didn’t come close to meeting. At first, that’s largely how the media interpreted it, too. After all, Yellen and her cohorts have jawboned noncommittally about rate hikes for months, with their language becoming more aggressive as economic data improved.
But then Fed Vice Chairman Stanley Fischer made things interesting, telling CNBC it was reasonable to interpret Yellen’s remarks as signaling two hike rates before year-end—one in September, one in December. Of course, he quickly walked it back, reiterating the long-running “it’s all data-dependent” mantra, but most observers were content to marry his “two hikes” with Yellen’s “the case has strengthened,” and penciled in a September move as long as the unemployment report, due Friday, isn’t a dud. For good measure, Fischer reiterated “it’s data-dependent” in a Bloomberg interview Tuesday, and said “I don’t think we know at the time we start whether it’s one and done or several.” Which is inconsistent with “two in 2016.”
To us, the Yellen-Fischer runaround highlights why investors shouldn’t pay much mind to what central bankers say. You have one Fed official giving his opinion on another’s completely noncommittal remarks, coloring her words with his own viewpoint, then walking it all back four days later. This is…not airtight? Then there is the fact that these are just 2 of 10 voting members, each with their own views and biases. All seem to see things differently, further muddying the waters for would-be Fed-forecasters. Gov. Daniel Tarullo suggested the Fed should focus on stronger inflation, not a stronger jobs market, to hike rates again. St. Louis Fed President James Bullard called himself “agnostic” on when the Fed should move, but said the Fed’s “framework calls for one, and only one, and then we go on pause for a bit.” Which contradicts Fischer’s comments. Atlanta Fed President Dennis Lockhart argued for a September rate hike in a lengthy Washington Post interview, attracting attention, and he isn’t even a voting FOMC member this year. All the rest have their own leanings and pet peeves. And lest we forget, it’s data-dependent! To know what the Fed will do, you’d have to know how each will interpret economic data, and what that data will show—impossible. For all the hype over everything Yellen says, her vote doesn’t count more than anyone else’s. She sets the agenda and policy options people vote on, but they all deliberate and haggle, and each one ultimately casts their own vote.
We actually thought the rest of Yellen’s speech was manifestly more interesting. Some of the geekier Fed watchers have occasionally pointed out that raising rates when the Fed’s balance sheet is at $4.4 trillion is far more difficult, technically, than doing it when the balance sheet is lean and there are far fewer reserves in the system. This time last year, there was some fear that the Fed was entering the unknown and would botch it, potentially roiling markets with its inability to guide rates. We’re only one rate hike in, but so far it has been smooth sailing, and the effective fed-funds rate is right where the Fed wants it, at the midpoint of the target range. Yellen’s discussion of how they did it was fascinating (once you cut through the dry academic tone) and might help instill confidence in some corners of the market. This isn’t a huge driver, but it’s still noteworthy.
That’s about all we’d encourage investors to take from the speech: The Fed has the tools to conduct its desired monetary policy. Whether it uses them well is another matter, but it’s impossible to know today—and impossible to forecast. As ever, investors will have to wait and judge the Fed’s moves as they happen.