Credit: Shutterstock photoFinancial markets are, by definition, relevant. The performance of stocks affects the wealth of many, particularly in terms of retirement accounts and savings. The fate of currencies affects the affordability of imported products and the cost of travel. The commodity markets control the cost of almost everything. The bond markets are perhaps the most relevant to our lives, influencing mortgage and other loan rates as well as the vibrancy of the overall economy. There are times, though, when the focus of market participants leads rational observers to conclude that traders, analysts, and other denizens of Wall Street live in an alternate world; a world completely detached from the rest of us, where the trivial becomes of paramount importance.
This week’s particular piece of trivia is just one word: “patient.” As ludicrous as it may seem, the presence, or rather the possibility of the disappearance, of that word when the Fed releases a statement following this week’s policy meeting is consuming market participants. It has been used to signal to the market that rate hikes were still a long way off, so the absence of it, most conclude, would suggest that the Fed was preparing for an interest rate rise in June.
This obsession with one word may seem absurd, but it is nothing new. The “patient panic,” as this Reuters piece refers to it is eerily reminiscent of the “taper tantrum” in 2013. Just because it is laughable, though, doesn’t mean that it is without impact. If you have any doubt as to the power of Federal Reserve language, take a look at what happened during the “taper tantrum.”
In the month following Ben Bernanke’s announcement that the Fed would begin reducing asset purchases the S&P 500 lost around 8 percent. The important thing to remember here, though, is that that was really a tantrum. It was all about a reaction to the ending of free money for banks and had nothing to do with the fundamentals of a recovering economy. That can clearly be seen if we extend that chart out to twelve months following the first use of the dreaded word.
Of course, signaling a period of rising rates after years of an ultra-low interest policy is not the same as indicating the gradual end of what was always intended as a short term emergency measure. As noted above, interest rates affect our everyday lives and are one of the most important factors in stimulating, or slowing, the overall economy. That said, though, the logic behind the move is the same; it is a reaction to an improving economy.
That is what should be uppermost in investors’ minds this week as we await the fate of “patient.” The Fed probably will remove the word from their language, but only to provide some flexibility. The FOMC has always maintained that any rate decision will be data-driven. In other words, it will only come when the economy looks strong enough to bear it, or even so strong as to create inflationary pressure. Given the Fed’s newfound reluctance to surprise the market, then, keeping a word that has been taken to indicate that no action will be forthcoming limits the options for reaction to data.
As stupid as it may seem to be so focused on one word, it actually is relevant to people living in the real world. The word’s removal indicates that the Fed sees significant economic improvement now and the possibility that it will continue. It doesn’t necessarily mean that they will be raising rates at the first opportunity, however. Therefore, while the language the Fed uses this week matters, the “patient panic” is really just so much noise and yet further proof that life in a dealing room can result in an unhealthy obsession with the trivial.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
