Joel Horneck And Fed Policy

George Yacik - Contributor - Fed & Interest Rates

Remember that classic episode from the very first season of Seinfeld, when Jerry wants to "break up" with his obnoxious friend, Joel Horneck, but just can't bring himself to do it? Jerry can't stand the guy, but the thought of actually telling Joel he doesn't want to see him anymore is just so painful that even after he gets up enough nerve and delivers the blow over lunch at the diner – after which Joel, not unexpectedly, starts to blubber and carry on in public – Jerry immediately backs off and apologizes, further prolonging his agony.

I thought of that episode (I usually think in terms of old sitcom episodes, much to my wife's annoyance) after I read the Federal Reserve's policy statement on Wednesday. It once again chose to kick the can down the road (I really hate that metaphor, but it does apply here) and put off raising interest rates until sometime into the unknown future. Apparently the Fed just can't bear the thought of having the financial markets pull a Joel Horneck on it.

Not only did the Fed not remove the "considerable time" language from its statement, as many market participants were expecting. Instead, it added a brand new noncommittal phrase, saying that "it can be patient" before it begins to "normalize the stance of monetary policy," i.e., raise interest rates from its current zero to 0.25% target range.

Of course, both being "patient" and "considerable time" can mean anything, or nothing, at all. What they absolutely don't mean is "right now" or "very soon." At her news conference following the statement, Fed Chair Janet Yellen said a rate increase won't take place for "at least the next couple of meetings," meaning well into next year, and maybe not even then. Who knows?

Perhaps Mrs. Yellen and the six of her colleagues on the Federal Open Market Committee who voted for the statement (there were an unusually high three members who didn't go along) thought they were being cute in adding another set of evasive, ambiguous words that show that it still can't make up its collective mind.

Is the Fed simply indecisive? Incompetent? Or simply afraid of what the market reaction might be if it stops prolonging a policy that is no longer necessary? Continue reading "Joel Horneck And Fed Policy"

It’s Time To End "Considerable Time" Talk

George Yacik - Contributor - Fed & Interest Rates

What do you think will happen first: The Federal Reserve starts to raise interest rates, or the Cubs win the World Series for the first time since 1908?

Richard Lehmann, writing in his Fixed–Income Watch column in the recent issue of Forbes magazine, says the odds are about the same. Lehmann expects the Fed to keep short-term rates pretty much where they are – i.e. at or near zero – for some time to come. "The Fed talks a good line and promises to act responsibly once employment and the economy improve or the threat of deflation disappears," he writes. "But that's kind of like waiting for the Chicago Cubs to win the World Series again."

Actually though, the chances of the Cubs winning the World Series soon don't look so far-fetched. Now under Theo Epstein, the principal architect of the 2004 World Champion Red Sox that broke the 86-year old Curse of the Bambino, the Cubs have put together a solid team of talented young players and added former Tampa Bay Rays manager, Joe Madden, as their skipper during the off-season. Now they've also reportedly signed free agent pitcher, Jon Lester. Las Vegas currently has the Cubs at about 14 to 1 odds to win the 2015 Series, one of the top eight or so teams in baseball.

Can we say the same thing about the Fed raising rates soon?
Continue reading "It’s Time To End "Considerable Time" Talk"

Mr. Draghi Fails To Deliver

George Yacik - Contributor - Fed & Interest Rates

Mario Draghi may have cried wolf one too many times.

I've watched with amazement over the past couple of years as the European Central Bank president has gotten more mileage from saying what he intends or plans to do in the future – without actually having to do it – yet nearly always gets the financial markets to do what he wants them to do.

But, it looks like he ran out of luck on Thursday when he announced at his regular press conference after the ECB's monthly meeting that the bank was going to put off until "early next year" any new measures to try to stimulate the moribund Eurozone economy.

Not surprisingly, the euro surged, sovereign bond yields rose and stock prices plummeted after Draghi’s disappointing remarks. The euro jumped over a penny, or more than 1%, against the dollar while yields on Italian and Spanish 10-year government bonds rose about four basis points. In recent weeks, yields on Eurozone sovereign bonds have dropped to their lowest levels on record on speculation that the ECB would soon start buying up those bonds, as well as those of other countries.

Before the meeting, it had been widely expected that Draghi would announce the ECB will start buying government, and possibly corporate bonds too, to try to boost inflation in the zone. So far it has bought covered bonds and other asset-backed securities, with little in the way of economic improvement to show for it. Indeed, at the ECB's previous meeting in early November, Draghi said the bank would take further steps to increase its balance sheet in order to boost the currency zone's economy, which many took to mean government bond purchases were next on the agenda. Continue reading "Mr. Draghi Fails To Deliver"