Thursday, March 19, 2015

Janet Yellen Speaks: Do Words Matter?

-Ron Paul
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.