(James Saft is a Reuters columnist. The opinions expressed are
By James Saft
April 10 Since neither words, nor charts nor
numbers seem capable of expressing when the Fed will raise
interest rates, perhaps they need to adopt some new kind of
What's the symbol for "The first day of never"?
Didn't Prince already use that?
Seriously, the Federal Reserve seems most comfortable with
that which expresses the least specific meaning.
We learned Wednesday from the minutes of the most recent
FOMC meeting that there was much concern that we not actually
believe the dot scatter charts the Fed goes to the trouble of
making which indicate their individual projections of the future
path of interest rates.
The problem was that the projections, taken together and
looked at, "overstated the shift" in individual members'
projections, according to the minutes, so we are not to believe
OK, so forget about the charts, what about numbers? Numbers
must be meaningful, right? Well, no, actually, the problem with
numbers is that they are so, I don't know, specific.
Having previously hung its forward guidance (a fancy central
banker term for "I promise, maybe") on the unemployment rate,
the Fed now thinks the 6.5 percent threshold is "outdated" and
so they are going to move to a range of figures to look at, but
without specific targets. Qualitative, rather than quantitative
is the new buzzword, but what it really comes down to is two
other words: subjective and vague.
Because, though it is true that the unemployment rate is a
poor indicator, this is not news. Even a casual observer, much
less a central banker, would long have known that the
unemployment rate is a blunt indicator.
OK, so, don't look at the graphs and don't give too much
credence to the numbers, fine, but words, words have to have
some specific meaning, right? Otherwise this whole "when will
the Fed raise interest rates?" thing might just look, I don't
know, capricious, or random.
Well, yes, the Fed leads us to believe, words are good, but
only some words in some contexts. Look to the monetary policy
statement they say, for the best guidance.
How about when the Fed chair explains things? Asked at the
press conference after the last monetary policy decision about
how to define the period between the conclusion of the taper and
the first rate rise, Janet Yellen answered:
"So the language that we used in the statement is
'considerable period'. So I, you know, this is the kind of term
it's hard to define. But, you know, probably means something on
the order of around six months, that type of thing."
THAT TYPE OF THING
Well, as it turns out, it may be that type of thing, without
being that exact thing, if you follow.
The truth is that the Fed isn't hiding anything from us,
they simply have little idea when, or how, we might reach a
position when rates could go up.
Don't get me wrong: I don't expect a foolish certainty from
the Federal Reserve. I understand completely that they operate
in a world in which they have very limited information and far
The problem is that this is not the way in which the markets
have been behaving.
So how ought investors respond to this new vagueness, or
should we say this new-found willingness to acknowledge that
being vague is appropriate?
There are two opposing schools of thought, and the market,
as usual, is alternating between them.
The first is that this is great news for risk assets. The
Fed isn't going to raise rates any time soon, so buy, buy, buy.
Buy like it's 1999 or 2007, except do so in confidence that the
Fed will keep things easy for as long as needed. That was the
original take on Wednesday, and it's probably wrong.
The alternative, which may be embodied by Thursday's sharp
selloff, is less rosy. If the Fed isn't in a position to raise
rates soon, and indeed can't agree on when it may be, perhaps
everything isn't so rosy.
After all, the Fed is going ahead with the taper, which we
may take for a signal that buying bonds was better for the
financial economy than the real one. So with the support from QE
ebbing, and with the zero bound forming a bit of a barrier to
new stimulus, the idea that the Fed isn't so confident about the
path to higher rates is perhaps telling us something about the
economy, and in turn about the value of riskier stocks and
If the market latches on to that idea, we may have quite a
bit further to fall.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at firstname.lastname@example.org and find more columns at blogs.reuters.com/james-saft)
(Editing by James Dalgleish)