The One Word That Matters Most – Redux


Fed Presidents Charles Plosser & Richard Fisher

By David Nelson, CFA

The debate surrounding an inevitable Fed hike has preoccupied investors and those sitting behind the hollowed walls of the Federal Reserve for the last half decade. The pros and cons of Fed policy have been well vetted. The conversation today seems to have finally shifted from “should” they remove accommodation to “when.”

Yesterday’s price action in bonds and interest rate sensitive stocks shows a big shift in sentiment regarding Fed timing. Could it be another head fake? Sure it could. Predicting Fed policy is fraught with peril but I’m going to step onto the battlefield once again.

With the German 10 year benchmark yield hovering close to 1% it’s going to be difficult for U.S. yields to make a significant move higher. However, the price action this month shows the consensus on the timing is starting to change. While the downtrend in the 10 year U.S. Benchmark Yield hasn’t been broken, 2 year yields more sensitive to a Fed hike seem to paint a different picture. Wednesday’s move pushed the 2 year yield to a one year high.

10 Year Benchmark Yield


2 Year Benchmark Yield


Inside the Room

I pointed out in July’s post,  FOMC Statement – The One Word That Matters Most, that many “inside” the room were becoming increasingly vocal. Some have expressed their concerns that the Fed was in danger of, as Dallas Federal Reserve President Richard Fisher puts it, “Staying too loose for too long.”

While Fed hawks like Fisher and Plosser continue to press Fed Chair Yellen to step up their time table, doves like Boston Fed President Eric Rosengren aren’t in a hurry to raise rates.

Regardless of which side of the debate you support there seems to be a growing consensus the Fed should alter their language to provide more flexibility.

CNBC’s Steve Liesman broke the story Tuesday pointing out that comments coming from both hawks and doves inside the Federal Reserve seem to support this view. He went on to say Fed watchers think the odds of a language change coming in next week’s FOMC decision have risen sharply. There’s a clear desire to move away from date based guidance.

Steve’s right and as I pointed out in July’s post the word considerable takes on added importance in next week’s FOMC Statement.

Morgan Stanley’s economic team did some excellent work on the subject pointing out that the last time the committee removed the word “considerable” from its statement, it increased rates six months later.

In 2003 under Greenspan the August 2003 statement read “…policy accommodation can be maintained for a considerable period.” By December it was replaced with “…patient in removing its policy accommodation.” Within 6 months the Fed hiked 25 basis points.

Change the Language

It’s important for the Fed to make this change. Leaving the phrase “considerable period of time” in place ties their hands. Steve points out that even doves like Rosengren believe it’s time for a language change because market participants aren’t incorporating enough uncertainty around the outlook for the Fed.

More Evidence



It wasn’t just Bonds that got slammed Wednesday. Utilities and Reits were also under pressure. The tug of war in bond yields will likely continue. On one side we have an improving economy and an increasingly restless Fed moving closer to the exit. The tag team on the other side holding rates in check is low yields in Europe along with rising geopolitical tensions around the world pushing many into the safe haven trade.

In any event, next week’s FOMC meeting will have Fed watchers hitting control F looking to find the word “considerable” in the release.