(James Saft is a Reuters columnist. The opinions expressed are his own)
By James Saft
April 10 (Reuters) - 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 symbol.
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 them.
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central banker term for “I promise, maybe”) on the unemployment rate, the Fed now thinks the 6.5 percent threshold is “outdated” and so they are going to move to a range of figures to look at, but without specific targets.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.”
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 less control.
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 bonds.
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 email@example.com and find more columns at blogs.reuters.com/james-saft) (Editing by James Dalgleish)