I have always argued that quantitative easing and zero percent interest rates were misguided policies to combat economic weakness. But as the years went on, misguided turned into irresponsible, which led to ridiculous, and then turned into dangerous. But lately, the only word that comes to mind is “surreal.” How should we react when central bankers begin to speak like Willie Wonka?
Contained in the latest release of the Minutes of the Federal Reserve’s Open Market Committee (Jan. 27-28, 2015) was a lively discussion of how to say something without anyone understanding what is being said. Although I have been critical of the Fed for many years, I never imagined that it would provide me with material that bordered on the metaphysical.
As Fed policies have become ever more critical to our economic health and stock market performance (see our 2015 Outlook piece in our latest newsletter), the degree to which investors and journalists dissect every public statement and utterance by Fed officials has increased remarkably. At present, one of the biggest points of contention is to find the true meaning and significance of the word “patient.”
Last year, as market watchers grew nervous with the Fed’s withdrawal of its quantitative easing purchases, many began to wonder how long it would be, after the program came to an end, for the Fed to actually raise interest rates, which had remained at zero since 2008. After all, this would shift the bank into a second, potentially more consequential, phase of monetary tightening. Investors wanted to know what to expect.
Initially the Fed let market participants know that it would hold rates at zero for a “considerable time” after the end of QE (9/13/12 press release), thereby creating a buffer zone between the end of QE and the beginning of rate increases. But, after a while, this also became too amorphous and static for investors who crave actionable information. So in December of 2014, in a bid to increase “transparency” (which is the central banking buzzword for “no surprises”), and to signal that the day of tightening had moved closer, the Fed replaced “considerable time” with the word “patient.” But this only deepened the mystery. Investors began to wonder what “patient” actually meant to the Fed. With potential fortunes riding on every word, the discussion was anything but academic.
