Why does such a simple word mean so much to so many?
It’s a question we’re left asking after the Fed set the interest rate-watching cognoscenti abuzz when it included a seven-letter word in its policy statement in December.
The ‘patient’ saga
“Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the Fed said back then.
So despite the widespread and long-held belief by many that rates were on the verge of rising sharply, the Fed indicated it would take its time – and the “patient” watch was born.
When would the Fed stop being “patient”?
It didn’t take long. Amid heavy speculation, the term was jettisoned three months later in its latest policy statement.
It follows, then, that rates will rise, right? Well, not so fast.
Since even before the Fed cut its benchmark federal-funds rate to near zero in 2008, commentators have ardently predicted an interest-rate spike is just around the corner.
Their logic seems to be based on the fact that because rates haven’t risen for a long time, it’s about time they did.
But does it make sense?
We think it’s time to rethink the assumptions.
Since the rate cut in 2008, growth hasn’t exceeded 2.5% on an annual basis.
For the first quarter of 2015, estimates of GDP growth are anemic, ranging from 0.1% to 1.6%.
Additionally, because of labor force dropouts, current employment numbers are weaker than they appear, and inflation is almost nonexistent, far from the Fed’s target rate of 2%.
In other words, there’s virtually no basis for a hike – except there hasn’t been one in awhile.
But let’s say the Fed does raise rates.
No one knows how much rates will rise and, most important, the Fed controls short-term, not long-term interest rates, which are most pertinent to municipal bond investors.
Yet fear mongers, nourished by the rate watchers, persist.
“Municipal bonds remain a favorite of financial advertisers and tax-conscious clients even though they could be vulnerable to interest rate hikes later this year,” warned an article from a prominent news outlet in January.
“Many clients are now eager to sell fixed-income investments before rates increase…” the piece continued, citing a financial advisor.
Just so we’re clear: Since 2010, advisors have told investors to abandon the bond market in anticipation of a rate hike, yet rates haven’t budged.
If we sound angry, it’s because we are.
We sympathize with those who heeded this advice and find themselves buried in money markets earning negative real returns.
A costly guessing game
Trying to make sense of the media reports during their incessant quest to parse meaning in every word from the Fed is futile.
For example, consider what Janet Yellen, Federal Reserve Board chair, had to say after the Federal Open Market Committee’s meeting last month:
“Today’s modification of our guidance should not be interpreted to mean that we have decided on the timing of that increase. In other words, just because we removed the word ‘patient’ from the statement doesn’t mean we are going to be impatient.
Moreover, even after the initial increase in the target funds rate, our policy is likely to remain highly accommodative to support continued progress toward our objectives of maximum employment and 2 percent inflation.”
Here, the Fed is reacting to the media buzz generated by the removal of the word “patient,” which – you guessed it! – generated yet another round of conjecture by the press.
And so it continues.
The losers in this endless cycle are investors trying to make sense of it.
The only logical conclusion they can draw from the nonsensical and contradictory reporting is to sell and wait – the worst advice of all.
The only thing we know for sure is that regardless of where interest rates stand, investable funds languishing on the sidelines aren’t doing what they’re supposed to do.
Meanwhile, investors putting their money to work when it’s available continue to get the last laugh.