Actions speak louder than words, unless the Fed’s doing the talking. Leading up to the Federal Reserve’s board meeting on March 17, one question was on every investor’s mind: would the Fed abandon its “patient” stance on raising rates?
As anticipated, Yellen announced that the world’s most powerful central bank was indeed losing patience. The omission of a single word prompted the Wall Street Journal to publish a front-page story titled, “Fed Puts Interest-Rate Hikes in Play”.
What this headline fails to convey is that Yellen also said “just because we removed the word ‘patient’ does not mean we’re going to be ‘impatient’.”
Just like that, Yellen calmed the markets’ nerves without really saying anything. It’s the latest example of what Peter Schiff accurately described as a way to “say something without anyone understanding what is being said.” In other words, it’s textbook double-speak.
The average person would doze off two minutes into a Federal Reserve press conference, but the market hangs on Yellen’s every word, and for good reason. Fed policy has been the driving force behind the economic recovery and soaring US stock market.
Central bankers routinely speak in vague terms, but the stakes have never been higher as the Fed looks to wean its debt-addicted economy off of stimulus.
If Yellen doesn’t choose her words wisely, the six-year bull market in stocks could come to an abrupt end.
In May 2013, then-Fed Chairman Ben Bernanke said the Fed would begin to “taper” its quantitative easing program, i.e., asset purchases. The introduction of a single word sent the markets into a “tantrum” that saw US stocks surrender 5% and prompted a selloff of emerging market assets.
Realizing the still fragile state of the economy, Yellen swapped the word “patient” for the phrase “data-driven,” which means policy actions will hinge on an improving labor market, wage growth, and rising inflation. Believe it or not, this subtle change in language gives the Fed even more wiggle room. And it comes after Yellen testified before the Senate in February, saying that the Fed “will at some point begin considering an increase in the target range for the federal funds rate ….” Clearly, the Fed has mastered the art of discussing raising rates without ever committing to anything.
Yellen & Co. deserve points for creativity, but the widespread of squishy language is putting the Federal Reserve’s credibility in jeopardy.
Investors must decide to take the Fed’s word on oath or read between the lines. The choice is obvious. Remember, we are talking about a 25-basis-point hike here. If that doesn’t make you question the strength of the recovery, I don’t know what will.
Sooner or later, the market will call the Fed’s bluff. When that happens, you’ll want to own hard assets.
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