"There is no mechanical interpretation of what the term 'considerable time' means. And as I have said repeatedly, the decisions that the committee makes…will be data dependent…I again emphasize something I've said previously which is that if the pace of progress in achieving our goals were to quicken, if it were to accelerate, I believe that the committee would begin raising its target for the federal funds rate sooner than is now anticipated and might raise the federal funds rate at a faster pace. And the opposite is also true if the projection were to change. So, there is no fixed mechanical interpretation of the time period." Federal Reserve Chair Janet Yellen at the beginning of Q&A at the Press Conference after the September 16-17, 2014 FOMC meeting.
I am not sure how many times Janet Yellen has to explain this concept of uncertainty, but hopefully "market participants" are starting to get it. After June's press conference, I noted that Yellen's insistence that "there is no mechanical formula" pretty much summed up the entire meeting. Clearly, that simple statement was not clear enough at the time.
It never ceases to amaze me how easy it is for media-built narratives to whip up the market from one obsession to the next. (Does anyone remember that just a few months ago the Fed was supposedly falling behind the curve on inflation?). Going into the latest monetary policy decision, market participants managed to stir up a discussion and debate about the meaning of "considerable time period" and how to interpret its inclusion or exclusion from the statement on monetary policy. Yellen has clearly learned well from her mistake earlier this year when she stumbled into a statement that provided an estimated timetable for rate hikes. Since then, she has stuck to the script…despite the market and/or the media's desire to pin down more specifics.
These artificial moments of angst over minutiae are perhaps just a way of whiling away the time as the Fed goes from one statement to the next with very little change. This latest monetary policy statement featured little to no significant changes in forecasts for inflation, economic growth, or unemployment. The one real point of interest was a significant change in the Fed's exit or normalization strategy. I believe only one reporter attending the Q&A session asked for more details on the plan. Part of Yellen's answer to the question DID include a timetable for the drawdown of its balance sheet: it could take until the end of the decade to achieve normal levels on the balance sheet if the Fed shrinks it just by a cessation of reinvestment. On balance, the Fed will shrink its balance sheet to "the lowest levels consistent with effective and efficient execution of policy."
All the bobbing and weaving around a specific timetable for hiking rates does beg an important question: what then is the point of even including a statement that implies a calendar-based decision? "Considerable time period" seems pretty useless when the Fed keeps insisting that the data will drive decisions and those data are in turn very uncertain. Robin Harding from the Financial Times had a related question during the Q&A period: "How should people understand guidance? If it doesn't have a defined meaning, then what purpose is it serving?" Yellen essentially said that the Fed wants to maintain its flexibility to respond to "unfolding developments." She reminded the audience that she has repeatedly noted that if events surprise the Fed, it will move earlier or later than expected. It was a non-answer that reiterated the primary point: anything can happen, we will just have to wait and see.
While the future of monetary policy is as hazy as ever, the response in the currency markets is much less fuzzy. The U.S. dollar index (NYSEARCA:UUP) rallied sharply into this meeting. The Fed did absolutely nothing to dissuade the market from its strong uptrend. Indeed, the revision of the exit strategy gives the appearances that the Fed is very serious about tightening policy whenever it starts. I initially fought the notion of a sustained breakout for the U.S. dollar, but I daresay now that the runway for the dollar should be clear some "considerable time" going forward. Relative to other major central banks, especially the European Central Bank (ECB), the Fed's stance is hawkish enough.
After some gyrations, the U.S. dollar index closed with a fresh 14-month high. If the dollar surpasses the highs from the summer of 2013, the next high to challenge will be the level from the summer of 2010 (between 88 and 89).
The uptrend continues for the U.S. dollar
I found it interesting to see how various currencies fared in the aftermath of the Fed's policy statement. The chart below shows that the euro performed the worst and the British pound (NYSE:FXB) performed the best. Of course, the British pound has already suffered mightily against the U.S. dollar for two months now. All these currencies lost ground to the U.S. dollar measured from the minute before the statement release to the close of U.S. trading. I am using this as a guide to guess at which currencies will fare worst in the wake of a continued strengthening of the U.S. dollar in the short-term and all else remaining equal. I normalized currency losses to the U.S. dollar using the euro's loss as the baseline.
The euro was the weakest currency in the wake of the Federal Reserve's latest monetary policy statement
Be careful out there!
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: In forex, I am long the U.S. dollar