Sitting on the Trigger: New Vernacular from the Fed

Janet Yellen’s first policy announcement as the new Chair of the Federal Reserve has come and gone. In many ways she adhered to the script drafted by predecessor Bernanke of a slow but steady tapering of the Federal stimulus program that started way back in November of 2008.

The Fed will now reduce its bond purchasing incentive to $55 billion a month, which still reflects a hefty amount of loose cash being added to an already unprecedented expansionary monetary policy. Yellen’s announcement was not without controversy and confusion, however. Her declaration that the stimulus could completely end as early as the Fall of this year took some by surprise. Her additional suggestion that the Fed could raise interest rates shortly thereafter, quickly drove Wall Street into the red and left many experts scratching their heads.

Why all the head scratching? Because rising interest rates are known rally-killers with often crushing implications for Wall Street. So as Yellen expressed disappointment with the recovery and portrayed a still-fragile economy that requires further support from the Fed, she also seemed to sound the death knell to the Bull market. The new Fed Chair has since clarified her statements about rate “timing” and “guidance” in an effort to calm market agitation and ease consumer nerves.

In doing so, however, Yellen expressed skepticism about the purported falling unemployment rate, concluding that it does not accurately reflect the health of the economy or the size of the American labor force. The new chief is clearly yielding to the reality of the under-employed and the disenchanted who have stopped looking for work and completely fallen out of the labor pool.  She went on to completely divorce future interest rate policy decisions from Federal unemployment data which she admitted could over-state the health of the job market, conceding that it is a “complicated assessment, not just based on a single statistic.”

If all of this sounds confusingly familiar, it’s because it reflects an economic policy that has been wrought with corrections, explanations, and clarifications. We have had an avalanche of Federal data that has been amended, modified and/or adjusted either up or down since the Fed started playing with the US Central Banking system. The reality is that the Fed’s balance sheet has swelled to over $4.1 trillion dollars, and we are left with an economy that has literally been propped up with cheap money for over 5 years

While the Fed cannot directly impact unemployment, inflation or economic growth, it has desperately tried to influence these things with its bond buying measures and a near zero federal funds rate since the start of the Financial crisis. As a result, when investors are solely holding paper savings, paper investments, and a paper retirement … what the Federal Reserve does matters greatly. Likewise, when Janet Yellen’s statements are unclear or unclarified, it can impact your personal wealth in a matter of minutes.

This is indicative of an unweaned economy driven by hair-trigger markets where any investor that is not well diversified in physical assets should be prepared for a fairly unnerving, wild ride.