“My message will be largely favorable, although recent developments have been mixed.”
That’s it ladies and gentlemen. We’ve officially reached the nadir of Fed communication. Janet Yellen is now telegraphing what she is about to say in a speech which is itself ostensibly meant to telegraph something else.
It’s a kind of bizarre evolution wherein at some point, policy makers started worrying that their policies would be misread by the market. So then they started talking about the decisions they just made. Then they started talking about decisions they might make later. Then they took it one step further and started talking about the conditions that might lead to future decisions. Then on Monday, Janet Yellen when all-in. She prefaced a discussion about the factors that may influence decisions she might make later by discussing those same factors in a preface to her discussion.
It would be kind of like a coach coming on before a game and saying “I’m going to discuss what our strategy should be tonight, but before I do that, I’m going to tell you what I think about the discussion I’m about to have with you.”
The over-communication seems to have reached a kind of strange pinnacle whereby each and every speech only serves to kind of inflate the market’s perception of the significance of Fedspeak. That, in and of itself, isn’t healthy - to say the least. But what’s worse is that no one really appears to be saying anything at all anymore and one has to wonder if perhaps that’s because both traders and policymakers no longer really understand what’s going on. That’s not to say that anyone has “run out of ammo” or some other cliche, it’s just that the rhetoric is getting more and more generic and kind of amorphous which is what happens when you no longer have any idea what to say. Here are some examples from Yellen’s speech:
“Recent signs of a slowdown in job creation bear close watching. If the May labor report was an aberration or reflects a temporary slowdown resulting from the weakness in economic activity at the start of the year, then job growth should pick up and support further gains in income.”
Well, yeah. If May was an “aberration,” then the next few months will by definition be better. That’s what an “aberration” is. There’s no reasoning or meaning in that statement. It’s just a tautology.
Here’s another one:
“I continue to think that the federal funds rate will probably need to rise gradually over time.”
So, for one thing, use of the term “probably” negates the whole purpose of saying anything at all. Because when you say “probably” you are implicitly saying “but maybe not.” So what the Chair has said there, translated, is something akin to this: “...I continue to think that the federal funds rate will most likely rise at a snail’s pace over time, but I’m not sure about that.”
By the point here isn’t to deride Janet Yellen. Clearly, this is an exceptionally intelligent individual and an accomplished economist (yes, you can be cynical and sarcastic and still recognize people’s accomplishments). It just seems to markets and traders that the people who are supposed to be steering this ship are now just talking in circles and frankly, it kind of feels like they’re doing it on purpose because they too have lost all track of the narrative.
Here’s the best way to conceptualize this: when you create something, you naturally have a tendency to think you can control it. And you usually can. For a while. Contrary to popular belief, Ben Bernanke didn’t invent QE. He just expanded it on a level that was previously inconceivably, stretching the limits of monetary policy in the process. He opened himself up to an enormous amount of criticism by calling his memoir “The Courage to Act.”
You know what? It was “courageous.” Not because Ben is a “hero.” But because when you go out and you singlehandedly make a decision to do something that will forever be judged by every economist for as long as the profession exists - yeah, there’s some courage there.
That said, unconventional monetary policy is out of control. Definitively. And here’s the thing market participants need to understand. This isn’t something anyone did on purpose. As we mentioned in these very pages last month, it’s “cool to be a bear these days.” ‘
But Janet Yellen and Ben Bernanke, and Jamie Dimon and Lloyd Blankfein aren’t out to get you. No matter what some pundit or commentator tells you. Does Dimon care that you drive a Mazda and he “drives” a helicopter? Of course not. But when Lloyd Blankfein got cancer a few months back I bet he was just as scared as anyone else in that situation.
So what does this have to do with Janet Yellen and her speech today?
It means this: Give her a break.
Eight years ago, all of these policymakers started out arrogant. Guess what? They aren’t now.
We’ll close with the following from from BofAML:
“It is fair to say that many clients are a bit confused and frustrated with Fed communication. The Fed seems to be constantly changing its focus from one meeting to the next. They seem to regularly promise hikes, only to back off at the last second. Fed statements often seem stale, reflecting where the economy and markets were a couple months ago, rather than current conditions. They say their 2% inflation target is not a ceiling, and yet they only plan to bring inflation back to 2%. They argue that the risks to the outlook are very asymmetric—with rates near zero they have limited anti-recession ammunition—and yet their inflation target is symmetric. This is policy transparency? Here we pierce the cacophony and offer a simple guidebook to understanding the Fed.”
No, they don’t. No need to track down that note.
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