You really stepped in it this time!
You know, the little faux pas you made during your first post-FOMC meeting press conference when you gave the markets a flash that the Fed might start moving short rates higher six months after the end of Quantitative Easing (QE).
Even though this policy move and its trajectory would seem pretty logical, the Street took it as a dire omen with the Dow Jones Industrials dropping over 200 points right after the pronouncement. The folks at CNBC were elated, as it gave them something to pontificate and obsess on.
It is surprising that Chairman Yellen, when confronted with a timetable question, did not take a chapter from her predecessor’s book and say that all of this would be “data dependent.” I’m sure Ms. Yellen would like a do-over, but you can bet it won’t happen again, unless the Fed is seriously determined to take the fire out of an overheated economy.
What is not surprising is that the media continues to try to make an issue out of this.
Remembering May 2013
On the publication of the minutes of the April 30/May 1 minutes of the Federal Reserve Open Market Committee meeting, both the bond and stock markets went into a tailspin because certain members of that committee were in favor of beginning the taper of QE as soon as June. Why? The economy had been showing considerable strength and (probably under their breath) enough QE was enough. When questioned about this before Congress, Chairman Bernanke was asked if tapering could begin “by Labor Day.” His answer, even though it indicated dependence on continued improved employment data, left the door open to the possibility of Labor Day being D-Day for the taper (Session 36 details the history), and that set off the decline.
Why were we so afraid of ‘the dreaded taper’? Because, everyone knew that it would be the beginning of much higher rates. Well back in May, when this flurry of speculation arose over a summer time start for tapering, rates did go up from a very depressed (fear depressed) 1.66% (Apr 2013) on the U.S. Treasury 10-year note to nearly 3% (Sept 2013), but they leveled off between 2.7 and 2.8% until the actual taper announcement in late December. At that time they spiked up to 3.02%. Friday March 21, 2014, the 10-year closed at 2.74%.
“Where’s the beef?”
There was no ‘beef’. The media and the experts ‘guessed’ wrong. Rates did not skyrocket because, although $4 billion per day of QE seems like a big number, in the context of the U.S. government and mortgage-backed securities markets, it is a rounding error. I detailed this in session 35b. Also, other than the move off the bottom last spring (a bottom formed in large part due to fear and panic), QE (other than psychologically) was not the major cause of the low rates we have experienced. Likewise, I believe that the experts will be wrong again, when the Fed begins to notch rates up. Why? Because this rate move will be ‘data dependent’ too, a signal our economy is doing very well.
Meanwhile, back at the ranch, the boneheads over at CNBC are peering through the wrong end of the telescope again, continuing to make a mountain out of a molehill. This clip from CNBC’s “Closing Bell’ Friday (3/21/2014) is a great example. While the CNBC regulars stir the pot, interestingly, the non-CNBC panel (counter to CNBC staff) seems to have put things into proper perspective.
From my vantage point everything the Fed does is ‘data dependent’. They are reactive to the economic conditions on the ground. Higher rates will be a function of a stronger economy (a good thing). The risks are that their read of the data gets them to: tighten too soon, tighten too fast or not tighten soon enough. But, it seems that we are not there yet and it will take persuasively good economic news for them to apply the brakes.
What do you think?
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