Patience is a Virtue, Unless It's Not

Amusing Headlines

It's amusing watching headlines of expectations and how things actually pan out.

• Yesterday MarketWatch reported Fed Minutes Could Show Growing Impatience With ‘Patient’.
• Today MarketWatch reports U.S. Dollar Sinks as Fed Minutes Surprise.
• Today MarketWatch also reports Treasury Yields Drop as Fed Says It’s in No Rush to Hike Rates.

Fed Minutes of January 27-28 Meeting

Lets dive into the Minutes of the Federal Open Market Committee, January 27-28 2015, released today.

Participants discussed the communications challenges associated with signaling, when it becomes appropriate to do so, that policy normalization is likely to begin relatively soon while remaining clear that the Committee's actions would depend on incoming data. Many participants regarded dropping the "patient" language in the statement, whenever that might occur, as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates. As a result, some expressed the concern that financial markets might overreact, resulting in undesirably tight financial conditions.

Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

Odds of Rate Hike Drop in June

Bloomberg reports Futures Show Traders Lower Odds for Fed Raising Rates in June.

Federal fund futures give a 20.7 percent probability the central bank will lift borrowing costs at the June gathering, according to data compiled by Bloomberg. That is down from 25 percent yesterday.

Policy makers judged that risks facing the U.S. economy argued for keeping interest rates near record lows for longer, the minutes from the Jan. 27-28 meeting showed. Expectations for a possible June increase had been growing since a government report showed payroll gains in January capped the biggest three-month increase in 17 years.

“Clearly, especially given the latest employment report, the market was expecting a little more hawkish tone to the minutes,” said Brian Smedley, an interest-rate strategist at Bank of America Corp. in New York. “The market has pushed out the implied timing of Fed lift-off on the back of what is perceived to be more dovish minutes.”

Is Patience is a Virtue?

The proverbial phrase, Patience is a Virtue, refers to one of the seven heavenly virtues said to date back to "Psychomachia," (battle of spirits) an epic Latin poem written in the fifth century.

If patience is a virtue, the Bernanke Fed followed by the Yellen Fed apparently are the most virtuous in history.

They follow the Greenspan Fed policy of "hiking at a pace that's likely to be measured".

Epitome of Impatience

By delaying rate hikes while ignoring housing prices, the Greenspan Fed sponsored the housing bubble. No one at the Fed saw the bubble until it burst wide open.

When the bubble finally did bust, the Fed cut rates at the fastest pace in economic history. It was the epitome of impatience.

Call it asymmetrical patience because Fed patience runs in one direction only. And that sponsors bubbles.

Problems for Yellen

The first problem for Yellen is the Bernanke Fed followed by the Yellen Fed created an even bigger bubble, this time in corporate bonds, junk bonds, student loans, and equities.

The second Yellen problem is the Fed Fund's rate is 0.0% to 0.25%. There's no room for asymmetrical responses.

Both Yellen and Bernanke are totally clueless about the bubbles they created. Things are about to get interesting. 

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com