WASHINGTON, March 18, 2015 – We promised you a brief update in our earlier report today and here it is. In short, happy days are here again (maybe), as the Federal Reserve in its afternoon statement seems to be standing pat for now on the hyperventilating issue of increasing U.S. interest rates.
This is great news for the bulls, who promptly jacked the Dow up around the 250 plus-point mark after the Fed’s 2 p.m. statement. (At 3:30 p.m. EDT, the Dow is up around 200.)
“Having created quite a storm with her statement, it is time for Fed Chair Janet Yellen’s press conference to confirm that nothing’s changed, USD strength is a ‘net positive’, there are no bubbles (apart from in bonds, which you should sell…), and any economic weakness/crash is merely transitory and weather-based…”
Zero’s pseudonymous “Tyler Durden” tends toward the hyper-cynical. But he’s largely on the right track in describing the essential opacity of the Fed’s latest missive.
Here are some tidbits, according to rough versions of the statement we’ve seen on the web, followed in parentheses by our pithy and witty comments:
- Business activity and grown “expanding at a solid pace” but has moderated somewhat. (Which means exactly what?)
- “Labor market indicators” suggest that “underutilization of labor resources continues to diminish.” (This actually addresses the broader U-6 unemployment rate, currently hovering at about 10 percent, a number White House politicians don’t want you to see. “Diminishing” underutilization, however—meaning engineers who are working as greeters at Walmart—is still terribly high, and the Fed knows it and is nervous about it.)
- The Fed notes that recovery in housing sector remains slow, export growth has weakened, inflation has declined further below the committee’s longer-run objective, largely reflecting declines in energy prices. (In other words, the suddenly super-powered dollar has absolutely crushed the kind of inflation expectations the Fed was counting on to start increasing the rates.)
- Inflation is expected to decline further, but rise toward 2 percent medium term. (Whatever “medium term” means. In other words, the Fed doesn’t have a clue.)
- For these reasons, the Fed says, “Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.” (There we go. The magic word is gone, BUT the statement is now modified in a way indicating that “patience” will still essentially apply to the Fed’s anticipated baby steps toward “normalizing” the “stance of monetary policy.” Translation: The Fed still plans on raising interest rates, but might be moving later and much slower than anyone had anticipated.) (UPDATED from earlier.)
- “However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.” (I.e., things change, and if they do, we’ll change right along with them.)
- “Conversely, if progress proves slower than expected, then increases remain unlikely at the April FOMC meeting.” (Translation: We’d really like to tell you when and how we’re going to raise rates at our next Oracle of Delphi meeting in April, but if stuff keeps screwing us up, we won’t, and you’ll have to wait.)
- Our conclusion: The Fed desperately wants to raise interest rates, but doesn’t see enough robustness in either employment or the economy to justify this just yet. The oil price decline has thrown a monkey-wrench into their plans, and worse, inflation has dropped recently instead of rising enough to justify that first tiny rate increase which will likely be 0.25 percent when it happens.
- Additionally, the continued and well-known-behind-the-scenes softness in the (unpublicized) U-6 unemployment measure means there is still a great deal of downward pressure on wages.
- So we adjourned our March meeting, and we’ll try again next month.
- Which means that it will almost certainly be July or even much later before we start jacking up interest rates even though we really, really want to.
And that’s why stocks are in blastoff mode as we near Wednesday’s 4 p.m. trading close.
We’ll have more observations tomorrow, once we digest what’s been happening today. Like much of life, much of Fedspeak remains a mystery.