We Aren’t at Defcon 1 – FED UP

janet_yellen_press_-_Google_SearchBy David Nelson, CFA

The FOMC Team concluded their 2 day meeting yesterday with head coach Yellen taking the podium to answer questions. As I said in yesterday’s blog that if the controversial term “considerable time” remained, the first question in the press conference would focus on that decision. CNBC’s Steve Liesman got the first nod and went right to the heart of it asking, “What does it mean time wise?”

Chair Yellen was quick to point out that there is no mechanical interpretation to what the term means. That certainly seems at odds with comments she made back in March when she said, “considerable time” between the end of the central bank’s quantitative easing and the first rate increase could mean “something on the order of around six months or that type of thing.” After a knee jerk reaction in both directions the (SPX) S&P 500 ended up less than 3 points on the day. The reactions in the currency and bond markets were far more interesting. From the moment of the Fed release, the Dollar traded higher with the 10 year benchmark yield tagging right along. The bond move certainly wasn’t dramatic but the Dollar now sits firmly up against a downtrend line that’s been in place for close to a decade. We should know soon if this is a false dawn for the Greenback.


The trigger pushing bonds lower and yields higher was likely the Fed’s median forecast now pointing to a fed-funds rate of 1.375% by the end of 2015. That’s higher than the 1.125% June forecast. If true and the June consensus for a hike holds, the rate of change will obviously be higher.


Jim Cramer

I’d like to take issue with Jim Cramer’s commentary on money managers in last night’s Mad Money. Jim believes that Portfolio Managers who believe the Fed is behind the curve are “completely out of touch with the average man on the street.” He went on to say “Hedge Fund Managers don’t think anyone is having a problem buying a house because they own 4 of them.” Let me say the following with all due respect. Jim has a legion of Fans and you can count me as one of them.

First, I for one don’t fit into that category and I think most money managers regardless of their financial status make decisions based on the data in front of them. I get it’s a populist message that plays well to the audience but its wrong.

Jim makes my point when he discusses his famous “They know nothing” speech made during the early days of the financial crisis. They were behind the curve then and they might be behind the curve now. The truth is we won’t know until after the fact but the history of the Fed’s ability to change course at inflection points is hardly a success story.

I don’t believe they need to change rates immediately either but I also would like to see them take the handcuffs off.  Despite the fact that the economy is certainly not where it should be and this is one of the weakest recoveries on record we aren’t at DEFCON 1. We’ve come a long way since 2008.

The Fed should give themselves the flexibility to move and react as conditions warrant. I believe this is part of the reason Fed Presidents Fisher and Plosser have been consistent dissenters. If and when the time comes to make a change they may not have the luxury of a 6 month Window. I can imagine a situation where the data and markets demand action and the Fed can’t react because they didn’t set the stage or give markets enough warning.