In our view the market frenzy over the FOMC statement and
Janet Yellen’s press conference remarks was much ado about very little, and
resulted from the market’s quest for Fed transparency that is impossible to
fulfill.
On the surface, the FOMC statement seemed quite dovish,
stating that it would be appropriate to maintain the target range for the fed
funds rate for a “considerable period of time” after the end of Quantitative
Easing (QE), even after employment and inflation approached the Fed’s
goals. Taken alone, there was nothing
in the statement to justify the market’s harsh reaction. If anything, it would seem as if policy was
even easier than it was prior to the meeting.
There were, however, two factors that made investors take
notice. First, the so-called “dots” that
indicate the views of all the Fed Governors as to where the fed funds rate is
likely to be at some future period indicated a slight rise in projections. Specifically, the forecast showed a funds
rate of 1.13% for year-end 2015 and 2.42% for year-end 2016, compared to their
previous forecast of 1.06% and 2.18%.
Although this was an increase of the projection by a mere .07% for a
point almost two years away and 0.24% for a point three years out, the change
loomed large in the eyes of investors.
Second, in answering a question by a reporter as to what
was meant by “a considerable period of time”, Yellen said, almost casually,
that it was hard to define, “but probably means something on the order of
around six months or that type of thing, but what the statement is saying is
that it depends on what conditions are like.”
The answer, seemingly given reluctantly in the most off-hand manner, was
immediately pounced upon by the market as virtually the only significant item
to come out of the meeting, although Yellen tried to emphasize that, in the end
it really depended on the data.
The problem is that in analyzing the Fed’s statements,
projections, press conferences and speeches, investors are desperately seeking
a kind of transparency that is impossible to achieve. Neither the Fed nor anyone else can possibly
know future economic conditions with anywhere near enough precision to know
exactly what they are going to do even six months out, let alone one to three
years.
In addition, in its efforts to be transparent about
future policy moves, the Fed is reliant upon forecasts that have proved to be
highly inaccurate in the past. In
January 2011, the Fed forecast GDP growth of 3.7% for 2011, 4% for 2012 and 4%
for 2013. The actual respective results
were 1.7%, 1.5% and 2%.
Rather than looking for the elusive transparency from the
Fed, we are focused on what they are doing now, and what the domestic and
global economies are telling us. The Fed
is gradually reducing QE at a rate that will end the program at the October
meeting, effective November. That, to
us, is the first step in tightening monetary policy, and it is happening at a
time when the U.S. economy is still stuck in its 2% growth rut, as it was
before the weather became the major factor to blame. In addition, as we discussed last week, the
Chinese economy is becoming a heavy burden on all of the economies dependent on
their exports to China. The stock market
has come a long way in the last five years and is now priced close to perfection
at a time when global economic growth is under pressure and geopolitical
problems proliferate. We continue to
believe that the risks, at this point are exceedingly high.