Today’s Fed statement and press conference by the Fed Chair Yellen managed to rally both debt and equity markets. The 10 year Treasury yield rallied to 1.92% from this morning’s 2.04% pre-statement yield. Investors were on edge in recent days as the Fed was expected to remove the word “patience” from their statement regarding the timing of the next interest rate hike. Usually this would spook markets, as Fed Chair Bernanke did in 2013 with the “taper talk” press conference which led to a volatile rise in interest rates, ie the “taper tantrum”. In fact, last week’s volatility indices were eerily similar to those of the summer of 2013. Yellen is cognizant of this history, and of the lessons of 1937 (“false dawn”) and 1994 (Greenspan’s sudden and premature rate increases). Both of those incidents derailed recoveries. Key takeaways included: (1) Yellen’s statement that the language change did not indicate “impatience”, signaling that the Fed is in no hurry to raise rates and has not decided on the timing, ie there is no “road map”; (2) Indications that there will be no rate hike at the next two meetings, the consensus for the first rate hike has moved from June to September; (3) The “dot plot” (predictions of future rates by FOMC participants) shows a slower pace of rate hikes than previously anticipated; (4) It’s about the data. The Fed statement notes that any raises will be “data dependent” and also noted that even with the recent robust jobs numbers, there is still some “slack” in the job participation and wage growth statistics; (4) Lack of inflation, the aforementioned “slack” combined with worldwide sluggish growth and plunging oil prices give the Fed some breathing room on inflation….stay tuned… David R. Pascale, Jr.
