Published March 20, 2014
It’s probably a good thing most Americans pay little to no attention to the daily workings of the Federal Reserve.
To be sure, the decisions made by Fed policy makers have a profound impact on the daily lives of Americans, affecting everything from their ability to find a job to the values of their homes and the amounts they pay on their monthly mortgages and car loans.
But the average American seems content to allow the presumably-wise economists at the Fed to guide the U.S. economy over the long haul without regularly demanding new information on how the central bankers are going about their primary tasks of keeping employment high and prices stable.
Not so professional investors and the financial media. These groups refuse to operate in what they apparently perceive as a vacuum, grasping onto any stray detail as proof that the Fed has signaled some important new shift in policy.
Newly installed Fed Chair Janet Yellen fell into this trap on Wednesday during her first press conference. Yellen suggested the Fed could begin raising interest rates as early as six months after phasing out its bond purchase program. If that was to happen interest rates could start moving higher in the spring of 2015, much earlier than many believed.
Yellen made the remark around 3 p.m. and stocks plunged immediately.
Red Meat for the Markets and the Media
But here’s Yellen’s quote -- mind you, in response to a question during her first live televised press conference: “It’s hard to define, but, you know, it probably means something on the order of around six months or that type of thing. What the statement is saying is, it depends what conditions are like.”
First, she qualifies her answer by saying it’s “hard to define,” then throws in a “probably” and an “around” to hedge her bets, and finishes with the eminently vague “or that type of thing.”
No matter. It was the red meat the markets and the media seem to crave.
By my count, the Fed in the past 12 months has made one significant shift to its long-term policies toward winding down the easy-money stimulus programs initiated more than five years ago to help spur economic growth in the wake of the 2008 financial crisis.
Otherwise it’s been steady as she goes.
In December, after telegraphing the move for months, the Fed announced it would begin tapering its monthly bond purchases by $10 billion per month at regular intervals. Few Fed announcements in recent memory have been preceded by as much speculation by market pros and media types as that December tapering statement, leading to months of market volatility.
Since tapering began, various members of the policy-setting Federal Open Market Committee (FOMC), ranging from doves like Yellen to hawks like Philadelphia Fed President Charles Plosser, have been loud, public and consistent in their message -- tapering will continue unless there is a dramatic shift in the direction of economic data. Even as labor markets stumbled early in 2014, the message remained the same: tapering will continue.
Palpable Deja Vu
Yet the daily speculation rolled on unabated with markets in tow.
The tapering issue finally seems to be settled (for the time being), so the market pros and media have moved on to the question of when the Fed will raise interest rates. The déjà vu is palpable.
If anything, the Fed has been more consistent on interest rate guidance than it was on tapering. For months (going on years, in fact), FOMC statements have said interest rates will remain at their current low range of 0%-0.25% well beyond when tapering ends and long after various economic indicators – namely the unemployment rate – begin to approach their pre-crisis levels.
Fed Chairman Ben Bernanke repeatedly hammered home that message during his regular press conferences.
Still, most market pros and financial media seem to interpret a lack of new information, i.e., message consistency, as a vacuum. And markets and the media don’t like to operate in a vacuum.
That’s not to say that there haven’t been inconsistencies along the way. Notably, Bernanke suggesting last summer that tapering would begin in the fall, then reneging on that plan until December. Add Yellen’s interest rate slip yesterday to that blooper reel.
Whatever inconsistencies have been conveyed, however, can legitimately be blamed on the Fed’s relatively new and well-intentioned effort to be more transparent, to provide more of the information demanded by professional investors ostensibly to help eliminate troublesome uncertainty.
Don’t Sweat the Daily Stuff
With a diverse cast of Fed members now free to say just about anything anytime anywhere, combined with regular press conferences by the chair and all manner of new future guidance, it’s hardly surprising that inconsistencies have occasionally emerged.
But overall, for the person casually paying attention, the message has been remarkably consistent: tapering would begin when the data justified it, and interest rates will be kept low for a long time after tapering ends.
None of that changed yesterday.
So my message to the average hard-working American is continue to go about your business, checking in on the Fed every now and then to keep an eye on the folks in charge of low unemployment and stable prices -- and let the market pros and media types (like me) sweat the daily stuff.