Investors hang on every single syllable of every utterance by the Fed Chairperson, and to a lesser extent, speeches given by the members of the Federal Reserve Board. While one cannot minimize the importance of what the Federal Reserve does, it is probably the most overanalyzed organization in the world today - only overshadowed by the attention placed on the Kim Kardashian and Kanye West marriage by the tabloids. Gone are the days when the Greenspan "briefcase indicator" on CNBC attempted to predict the outcome of Fed meetings based upon how thick former Chairman Greenspan’s briefcase appeared to be when he headed into the meetings. While the “briefcase indicator” was mostly in jest, it points to the obsession of investors and the media on the outcome of these meetings.
There are some reasons why all this attention on the Fed is warranted – just not at the level it experiences today. The Fed does have control of the Federal funds rate and has been impactful in lowering longer-term interest rates via quantitative easing. However, the Fed's real influence comes in the form of managing the market expectations by what is said. In fact, setting expectations by what is said is perhaps more important than what the Fed actually does in many cases. While the Fed needs to have the authority to back up what it is signaling to the market, the way in which they suggest the direction of how they are moving policy is the most important factor.
One recent example of this “power of suggestion” occurred last summer. At the time, then-Fed Chairman Ben Bernanke made a statement in a post-Fed meeting press conference that tapering of quantitative easing would begin in the near future. This announcement caused interest rates to move sharply higher in anticipation of the tapering which was probably beyond the intention of Chairman Bernanke. In fact, even the notion that there must be post-meeting press conferences is a relatively new phenomenon. Originally, the stated reason for the press conferences was to increase transparency. The less publicly-stated reason was to have a platform available to set expectations.
The Fed statement on Wednesday, June 16, was nothing new. The Fed commented that while unemployment has come down, it is still elevated. However, household and business spending is on the rebound. The Fed also repeated that the tapering of quantitative easing will continue and interest rates should stay low for a long time. This theme continued during the post-meeting press conference where Chairperson Yellen carefully answered reporter questions while taking pains not to add new expectations. No new news was the market expectation going into the meeting, so there was essentially no reaction by the stock or bond market from the Fed meeting minutes and subsequent press conference. Now the markets will turn their hyper vigilance toward future meetings and Fed speeches.
Our Takeaways for the Week
- Low interest rates are not a permanent condition. As the economy and labor market heal we anticipate interest rates will drift higher over the next two years. This should be good news for savers and investors.
- The market will continue to focus on any perceived change of Fed messaging.