Janet Yellen, new Chair of the Federal Reserve, held a press conference yesterday, following release of the agency’s policy-setting Open Market Committee.
The committee’s decision was the expected one–to continue its program of winding down over the next six months its program of buying boatloads of federal government bonds.
During the Q&A session, a reporter asked Ms. Yellen how soon after the bond purchases end in September it might be before the Fed begins to raise short-term interest rates in the US from their current ultra-emergency low of 0%. Her answer: assuming the economy continues to strengthen, six months or so. In other words, about a year from now.
This reply sent the stock market, which had been within a stone’s throw of its all-time high, into a tailspin.
From the perspective of investors like you and me, the Yellen comment is not new news. It’s pretty tame. In the fast-twitch world of short-term traders, however, the stock market response is understandable. The market was likely bouncing against the top of its near-term trading range, so down was the likely short-term direction no matter what the news. Also, this is also the first occasion when the Fed has said when short-term rates might begin to rise. It’s a few months earlier than the consensus had expected; more important, the timing has been made (more or less) concrete. And the actual shoe dropping–no matter how widely anticipated–almost always provokes a market reaction.
The more interesting issue, to my mind, is why Ms. Yellen said what she did. I can think of three possibilities:
–Maybe she didn’t intend to specify timing and made a rookie mistake.
–More likely, in my view, the Fed may have made a far more decisive turn toward restoring money policy to normal than the Wall Street consensus has thought. Yesterday would have presented a good occasion for starting to get this new information disseminated. The fact that the stock market is at/near record territory suggests it is in a good position to absorb the news; one might even ask if the Fed is worried that too much money is chasing speculative stocks. Maybe it wouldn’t mind if stocks went down a bit.
–It’s also possible, though I think much less likely, that the Fed has come to believe that its current easy money policy is having a negative effect on the economy. Maybe it is coming to view itself as an enabler of Washington dysfunction, that the White House and Congress have the luxury of doing nothing because money policy is so loose.
After all, what do we really know about Janet Yellen. Well, she has a grandmotherly appearance and a vaguely unpleasant speaking voice. That may lead one to forget that she is a woman who has risen to the top of a profession dominated by men. This means that behind her mild-mannered exterior, she has to be super-competent and very tough.
From an investor perspective, I think the takeaway from the press conference is that monetary policy normalization is no longer an amorphous thing somewhere out in the future, but is rather an important fact of life that must be factored into any investment decision. We also have to begin to figure out whether or not a latter-day Margaret Thatcher is emerging as head of the Fed, and what this would mean for stocks.