I have never seen so much ink and air/web time wasted on one topic … When and by how much, and over what period of time will short-term interest rates be moving higher? Speculation on these questions has been rife over the past two or three years (maybe even longer). The Fed, for the most part, has been somewhat circumspect (save pronouncements of individual Fed Governors stating their own personal opinions). The stock response is the timing and amount would be ‘data dependent’. Obviously, this has created some uncertainty, uncertainty which the market hates. But, based on the tenor of recent Federal Open Market Committee meeting notes, the time of the ultimate ‘lift-off’ is nigh. As Wall Street and the media are grow fidgety, a light may have just been shown on the subject.
We may have just been given the template to answer this question.
Interestingly the Street greeted this revelation with little enthusiasm and greater-than one percent drops in the DOW, S&P 500 and NASDAQ composite. So, what was the news?
Janet Yellen’s right arm, Fed Vice Chair, Stanley Fischer, in a speech May 25, indicated that the Fed intended to move at a “gradual and relative slow” pace. Then he put some meat on the bones of what appeared to be no-new-news Fed boilerplate … according to this MarketWatch piece, “Feds Fischer sees short-term rate at 3.25-4% in three to four years.” Remember, this is not some regional Fed president opining on what they believe the policy should be. This is a respected international banker, number two at the Fed, talking a glide path that from his vantage-point seems to be the most reasonable (probably commentary in tune with Chairman Yellen’s views). He also criticized the Street for its negative laser focus on the first increase. No question this obsession is way overdone.
This looks like guidance to me!
And this guidance might help those looking for some degree of certainty a chance to gain some perspective. Some may actually come to ask the question, ‘What are we worrying about anyway?’
A little perspective, please.
Since the Dow Jones Industrial Average first bumped up against 1000 back in 1966, the Fed Funds rate has averaged well over 4%. In the 1990s we had a booming market with that rate well above 5%. BTW, we have seen wonderful markets with Fed Funds at 6 and 7% (44 year history, FF rate/ highs/lows with major events). Why are we so confounded by a three or four year move to 4%? The emergency is over.
My only answer is that many of the people managing money today lack the perspective found in the above commentary or attached article. Some were in diapers in April of 1982 when the Fed raised the FF rate 3% to 15%. This happened to be one of the best buying opportunities in stocks in the last half of the twentieth century (the rate was even higher in 1980, a whopping 20%).
Some dismiss Fischer’s statement as ‘nothing new’.
In one respect they maybe correct, as The Fed has been telling us that the process would be ‘slow and measured’, ‘data dependent’. Rick Santelli, CNBC’s Chicago interest rate guru said, it was “nothing new.” I view Santelli as a great contra-indicator. I think the Fed Just laid its cards on the table. And, like “The Dreadful End of Quantitative Easing”, we will look at the ‘lift-off’ as somewhat of a non-event. It could even be supportive of the economy as it may encourage business and government (oh yes, homebuyers) to move on capital projects before rates go higher.
An interesting note on today’s market
With Fischer’s comments and relatively good economic numbers today, one would think that they would have really beat up the 10-year US Treasury note … WRONG! The price went up and the yield down, 9 basis points to 2.14%. What are they worried about now? Grexit potential is back in the news and the greenback is strengthening… gimme a break!
I guess the great interest rate mystery is only partially solved.
What do you think?
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