Last week Fed Chair Janet Yellen held her inaugural post FOMC meeting press conference. She began with a lengthy pre-arranged statement and then demonstrated her knowledge during the question-and-answer segment.
The press conference was highly anticipated because the Fed Chair is one of the most powerful leaders in Washington and may hold the position for many years.
For the financial markets, a surprise came when she indicated that the Fed could raise interest rates as soon as six months after the tapering ends. That would mean short-term rates would rise around mid-year 2015.
The stock market quickly fell on the news, although it was nothing new. Yellen’s casual remark was consistent with what financial futures and private sector surveys already indicated.
Analysts often act like the Fed knows what they will do six months and even a year from now. They don’t.
Like most everyone else, the Fed has been overly optimistic regarding the economic outlook. Yellen admitted as much. The Fed will look at the data and do whatever it wants, anytime it wants and for any reason.
The unemployment rate is no longer a benchmark. Instead, the Fed will look at many measures. That’s nothing new. If the economy grows at 3 percent and inflation gets close to 2, they’ll raise rates in a slow fashion and not too far.
The 10-year should be yielding the same as nominal GDP. Three percent real growth and two percent inflation would get you to a five percent rate, which is more than double today’s rate (2.75). That’s not a killer for stocks.
For one, that would be later next year or beyond. More important profit growth in such an environment would accelerate.
Of course, there are so many potential catalysts to de-rail longer-term forecasts that it’s hardly worth the exercise. Suppose GDP growth doesn’t accelerate toward three percent.
Forecasting GDP growth has been a humbling business the past five years. We’ve been set up for faster growth before only to be disappointed.
I’m not anticipating sharply higher rates, not even after the tapering is complete. It would take a strong economy or sharply rising inflation for that to happen.
That’s unlikely. After a few disappointing economic reports Yellen’s casual remark about six months will soon fade.
David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.