Considerable Exuberance
by Rick Welch on Dec 18, 2014
The awkward sounding term considerable exuberance seems to capture the reaction of the global financial markets to yesterday's Federal Open Market Committee (FOMC) Meeting Announcement. What we learned from this Meeting is best summarized in the following statement quotation:
"Based on its current assessment, the Committee judges that it can be patient in the beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of the asset purchase program in October."
Thus, our obsession with translating one or two word phrases or terms of our Fed Chairman continues. For all Fed watchers who read our blog today, you are sure to quickly recognize that the title "Considerable Exuberance" is a combination of two famous phrases used by different Fed Chairmen. The term irrational exuberance was first coined by Fed Chief Alan Greenspan on Dec 5, 1996 as he attempted to describe and warn us of a pending asset price bubble which could subject the market to unexpected and prolonged contractions - his fears were realized just 4 years later when the tech bubble burst. Our obsession today is with the term considerable time which Fed Chief Janet Yellen has used often in reassuring the markets that an initial rise in short term interest rates (known as tightening) is still months away. As we reread the quote above, we must note that a new term may now have been added to the mix - patient. The question then becomes which term, considerable time or patient, is more telling of what the Fed may do in 2015.
As for the timing of the initial hike, this announcement suggested that any rate increase was at least two FOMC meetings away or until after the March 17-18, 2015 meeting. We will continue to advise our clients not to fear the Fed. When (not if) tightening occurs, that should be affirmation that the domestic economy has recovered to the point where it is strong enough to withstand the shocks of external forces and pressures (slide in crude prices, slow growing Europe, weakening Russia, etc.). When tightening does begin it is most likely to be gradual, however, even a plan of gradual tightening can upset the financial markets.
Earlier this fall, Liz Ann Sonders, of Charles Schwab, wrote the following: "It is common to experience some volatility and initial pullbacks when moving toward the initial rate hike. In looking at the past five rate hike cycles, the average pullback - nearly always having concluded before the actual first hike - was less than 6%. It is important to note that overall, the stock market fares pretty well in the six months before and after the initial hike." Her article referenced a study by BCA Research, Inc. that suggested that in the six months immediately following the initial rate hike the market climbed, on average, 10.6%.
I think you might enjoy reading another article by Liz Ann, posted yesterday, entitled "Your Time is Gonna Come:From Considerable Time to Patient" and suggest you follow the link below:
http://www.schwab.com/public/schwab/nn/articles/Your-Time-is-Gonna-Come-...
