Last week, Federal Reserve Chair Janet Yellen held her first press conference, where just a few brief words managed to upend the financial markets. When asked about the possible timing of raising short-term interest rates, she explained that there would be a “considerable period” between the end of the bond buying program—currently being wound down at a rate of $10 billion a month—and an increase in rates. What’s “a considerable period”? Nothing too specific, maybe “about six months.”
That was all it took for equity markets to plunge, bond markets to spike with volatility, and to unleash a flood of commentary. According to financial media, Yellen had committed a serious gaffe in her first major public event and had shown insensitivity to the impact of her words. Some even claimed that her remarks roiled markets because they epitomized a Fed that has long been simply making up policy as it goes along without any consistency or clarity.
This sort of mini-tempest isn’t unique. Investors, traders, financial writers, and policymakers have developed a startling dependency on what the head of the Federal Reserve does or does not say. Europeans have their own version of it surrounding the declarations of the head of the European Central Bank, but the syndrome is particularly acute for the Fed and Americans.
What Yellen said was fairly innocuous, and should have been taken as such. That it was not speaks to an unhealthy infantilization of finance-land that treats the Fed as some sort of in loco parentis. Yellen becomes the all-powerful mother, whose casual utterances and observations assume oracular weight. Far too many in market-land simply react to the words, invest them with their hopes—or in this most recent case, their fears—and then attempt to find the right trade.
The fear du jour is that interest rates have been kept too low too long and that, once they start to rise, everything from bonds to equities to real estate to sovereign debt will be at best in flux; at worst, a lurking financial bubble will be exposed. All of that anxiety has been triggered simply by the suggestion that short-term rates might go to 25 basis points from their current level of zero, at some point in the middle of next year. Really?
This isn’t just a Janet Yellen phenomenon. Last June, then Chairman Ben Bernanke suggested that the Fed would begin to taper its $85 billion of bond purchases a month. The market reaction was sudden and swift, with a massive sell-off in emerging market equities and a sharp rise in interest rates for all but the supposedly safest of U.S. treasuries. One of the loudest complaints was that Bernanke hadn’t adequately telegraphed his timing prior to the announcement, and that as a result, far too many people were “caught off guard.” Then, when Bernanke shifted the timetable again in light of the U.S. government shutdown in the fall, the complaint was that he was being inconsistent.
You could easily dial back further, to the Alan Greenspan era, when the true fetishization of the Fed and its chair began. Yes, Paul Volcker attracted legitimate attention and market-land carefully tracked his policy signals, but the Greenspan era marked something new. Perhaps it was the coincident rise of the 24/7 financial media along with the heady stock market bubble of the 1990s. Perhaps it was the collapse of that bubble in 2000 followed by recession and then the post-9/11 War on Terror that saw the Fed become increasingly active and aggressive in addressing crises. And surely the unprecedented actions of the Fed in recent years to undertake its policies of quantitative easing and bond buying, in addition to setting short-term interest rates, helped make the bank and its chair appear even more pivotal.
Yet there is a difference between paying due heed to an important actor and hanging on every if, and, or but to the point where global markets can shrink or expand by trillions of dollars based on casual remarks. The complaints that often follow these reactions—that the Fed has misled or created unnecessary confusion—speak less to a mercurial Fed than a dysfunctional investing class that seeks comforting road maps in lieu of grappling with an ever–evolving and constantly morphing world.
One of the Fed’s governors, Charles Plosser of the Philadelphia Fed, said on Monday he was surprised that markets reacted so strongly to Yellen—no one in the Fed is seriously contemplating raising rates until its program of bond buying winds down. But Plosser could have made a more damning critique, which is that so many people involved in financial markets have abdicated their responsibility to analyze the world with all of its uncertainties. As a result, they can’t handle policymakers frankly discussing the vagaries of future outcomes. Instead, they panic.
The very notion that Fed policy—or any central bank policy—is the primary determinant of the global financial system should be questioned. Yes, central banks have a played a vital role in staving off crises in 2008–09 and again in the fall of 2011 surrounding the possible departure of Greece from the eurozone. Yes, we live in an environment of very low interest rates. Yet the assumption that central banks provide the sole causation for global interest rates would come as a surprise to most central bankers. Trillions of dollars of bonds have rates that float based on myriad decisions of individual and institutional investors, of multiple governments, and companies. The Fed only controls short-term interest rates; the rest is the market in all of its messy mystery.
Scarred by the past years, many in the markets have a financial version of post-traumatic stress syndrome, unable to process information with any balance and constantly on edge for the next crisis or collapse. That lens makes it nearly impossible to digest information and weigh its relative importance. The issue, then, is not the Fed and what Yellen or anyone else says or does not say. We should welcome more discussion and debate about the inherently uncertain shape of the world to come and what policies might improve those outcomes. It’s unfortunate that so many in market-land cannot engage that discussion, but that doesn’t mean we should stop having it.