Janet Yellen Speaks: Do Words Matter?

For weeks, if not months, investors have been agonizing over whether or not the Fed would remove the word “patient” from its assessment of monetary policy. The word indeed was removed at today’s Fed meeting. Chairman Janet Yellen, recognizing that the markets were acutely aware of the significance and meaning of the word “patient,” was quick to explain that just because the word was removed the Fed had no intention on being “impatient.” In other words, the word is important but the central bank’s policy may forever be in flux. It was anticipated by the markets that if the word was removed it meant that the Fed was moving closer to a rate hike in June. However the explanation given by Chairman Yellen that the economic conditions are not all that robust means the likelihood of a rate hike is slim – at least for the foreseeable future. The markets, however, interpreted it that the Fed statement actually canceled out concern over the removal of the word “patient,” and the markets rallied (except for the dollar).

It is amazing to me how much time and energy the financial pundits, speaking for Wall Street, put into making major decisions all based on a word or two from the Fed. It’s not that what the Fed says does not have consequences in the financial markets, but rather that it is so readily accepted that the real market and the real economy is of not much consequence. Before the obsession with the word “patient,” the concern for nearly two years was about two words that the fed used to describe when interest rates might be raised — that rates would not be increased for a “considerable time.”

The “herd mentality” is alive and well on Wall Street. Though some may benefit from the very sharp and sudden changes in the market, ultimately this represents a market that is fragile and a dangerous place to try and preserve one’s capital.

A few words from a Federal Reserve report in the short run has a much greater significance in determining the future of our economy than some hard cold facts about what’s really going on. Currently we’re facing a labor force participation rate of 62.8%, a 37 year low, with 93 million people now out of the workforce. Sadly, since 2009 twelve million individuals have left the workforce. These facts are hardly reflective of the reports from our government that the unemployment rate is dropping and is now 5.5%. Technically speaking, in the past seven years there have been no new full-time jobs created when one considers that the population growth has been 16.8 million. There is no evidence that quantitative easing and 0% interest rates have been of any benefit to the economy. Since 2008 the Fed’s balance sheet expanded fivefold to $4.4 trillion with nothing much to show for it.

There is no way to know with certainty what the Fed might do in the future, but I’ve been on record as saying that under the circumstances I find it practically impossible for the Fed to ever get around to deliberately raising interest rates. They know what many Americans know, which is that the economy is much weaker than our government tries to get us to believe. Massively inflating the money supply obviously is not the solution.

The Federal Reserve’s report today was totally worthless for revealing to us what is actually going on in the economy and what to expect. Now that this report is finally out and the word “patient” has been removed, the agitation over what the next meeting might bring begins. When the big crisis hits, all this nonsense about holding our breath and weighing every single word to determine which way the economy is going to go and what investments to make will end with a rush out of all paper assets including the currencies, and this will wreak havoc on the entire world financial system. Interesting but dangerous! Expect no solutions to come from the US Congress or from the Federal Reserve. Before this crisis is resolved it will require monetary reform and the shrinkage of the size and scope of our government, which every day becomes more out of control. It’s not that difficult. All we have to do is reject the notion of following a herd mentality.