Get Our Email Newsletter

MARKET ANALYSIS: April 2015

Fed Policy Update: “Patience”


Last fall, the Fed’s forward guidance was captured in the term “considerable period.” This meant that a rate increase was not likely for at least six months. Fed observers were concerned that when the Fed dropped those words from their post-meeting communication, a rate hike was imminent. Yellen did eventually shift the wording and a new term was inserted—Patience! The strength in the job market in late 2014 and several quarters of strong economic growth made it clear that a rate hike would be needed sometime in 2015.

What does “Patience” Mean?
Although it is understandable why the Fed needed to adjust the wording, the financial markets really do not know when or how aggressively the Fed will act. Headlines such as “Plenty of Noise, but Not Much Guidance” (WSJ 3/1/15) or “Fed Ushers in New Era of Uncertainty Over Rates” capture the problem.

Yellen helped define “Patience.” It means the Fed won’t raise rates for two meetings after they lose “Patience.” They will be watching the data closely to decide when is the right time to move rates. But that is merely telling the markets the obvious—The Fed always watches the data.

LBM Resources

White Paper: How to Stage Your Company for Sale

WHITE PAPER: How to Stage Your Company for Sale Staging your company for sale and obtaining maximum value takes time and discipline because the process...

As a result, since nobody really knows which data report will lead to the loss of “patience”; the market is left to its own devices to interpret each data release and potential Fed actions. Clearly one of the most important pieces of information is the employment report. The employment release on March 7 triggered a strong reaction and major sell off in the stock market because this might, and I stress the word might, be the catalyst for the rise in interest rates. Employment rose a very strong 295,000 new jobs. This brought average job growth to 275,000 per month over the last year. Unemployment fell to 5.5%—at the upper end of the Fed target range.

Other reports also suggest that wage rates are beginning to accelerate. Announcements by Walmart and the survey of planned wage increases by small business also support that the unemployment rate is finally being reflected in improving wage rates. This would be confirming data the [glossary]FOMC[/glossary] needs to drop the word patience. But here is the problem: No one is sure yet!

So the focus will be on the communication released after the March FOMC meeting. If the word Patience is missing, then rates will start to move higher in June or July. If not, then the rate increase will probably not be until the September meeting. Rates will certainly start moving higher this year and continue to move higher over the next two years.

- Advertisement -

The next big issue everyone will struggle with is how far rates have to go before they are “normalized.” By normalized, the FOMC wants to move rates to a level that is consistent with trend growth and modest inflation by 2017. Right now, their view is that of 3.5%—assuming a trend inflation rate of 2% and productivity growth of 1.5%. Some economists believe that target rate is too high however.

Get our free newsletter

Join thousands of other lumber and building material industry leaders and keep up with the companies, people, products and issues shaping the industry.

What's New

Digital Partners

Become a digital partner ...

Sales Comp Study

Download this 55-page, in-depth study by LBM Journal of industry trends in sales force compensation and benefits. See how your organization stacks up.

Webinars

- Advertisement -

White Papers

View all ...

- Advertisement -

Partner Content

View all ...

- Advertisement -

Registration is now open for the LBM Strategies 2024 Conference