Let us first state that for a long time the Federal Reserve has had its own language, known as “Fedspeak,” a dialect which according to noted Princeton Economist Alan Blinder employs vague and wordy statements meant to be interpreted several different ways. The intended effect was to minimize the reaction of the financial markets to their remarks. Over the past couple of decades the Fed has successfully attempted to become less vague in their policy statements. Alan Green span was vague, Ben Bernanke a little less so and today many can almost understand current Federal Reserve Chair Janet Yellen.
The Open Market Committee of the Federal Reserve (FOMC), the body that determines the direction of interest rates and one that is Chaired by Ms. Yellen concluded its regularly scheduled two-day meeting this past Wednesday, March 18th. Voting members decided to keep the target level at which member banks loan excess reserves to each other at between 0% and 0.25%. This rate, known as the Federal Funds rate, has been at this historically low level since the Fed, under then Chair Ben Bernanke, lowered it from a target of between 0.75% and 1.00% on December 16, 2008, more than six years ago, in order to stimulate economic growth. In fact, that Fed has not raised this rate in nearly nine years. Also referred to as easy or accommodative, the current policy was set in place to combat the recessionary spiral the economy was tumbling into during the Fall of 2008 as the housing crisis set in. Furthermore, most would consider the current level unsustainable and at rates that imply extreme economic duress.
The focus on the word “patient” began back in December and then became more pronounced this past February when, during her Semiannual Monetary Policy Report to the Congress, Ms. Yellen stated that “the FOMC’s assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings.” The markets interpreted this as stating that should the word “patient” be removed from its policy statement that it would mean a hike in the federal funds rate would follow over the next meeting or two.
Indeed, following the meeting that concluded Wednesday, March 18th the Fed did remove the word “patient” from its policy statement. However, in classic Fed fashion and one that appeased the bulls on Wall Street Yellen stated that “just because we removed the word ‘patient’ from the statement doesn’t mean that we are going to be ‘impatient.’” Yellen went on to note that “it’s still the case that we consider it unlikely that economic conditions will warrant an increase in the target range at the April meeting. Such an increase could be warranted at any later meeting depending on how the economy evolves.”
Finally, within its policy statement released following this meeting it was noted that “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% objective.”
The above is of note due to the dual mandate that the Fed pursues. As amended by Congress in 1977 the Federal Reserve Act stating that “the Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the economy and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”
The Fed has obviously set the wheels in motion to perhaps raise interest rates over the next twelve months. However, with most other central banks around the world cutting rates or embarking on some sort of stimulus program, with the dollar strengthening, with oil prices plummeting and with inflation around half the intended target we view any hike in rates, should it occur, to be merely symbolic. Also, due to the magnitude and length of the last recession we view it highly unlikely that the Fed will embark on any program that would imperil the modest recovery we are experiencing.