The Great Appeasement and the Burden of Proof

After six years and two months of 0% interest rates with three rounds of quantitative easing (QE) in between, the Federal Reserve chose to finally remove the word “patient” from their official statement. Hawkish at last! Not so fast. I once heard that you should never underestimate the dovishness of Janet Yellen and she delivered on that reputation on Wednesday.

In a grand gesture of appeasement, the Fed took a hatchet to their projections (called “dot plots”) for the path of the Fed Funds rate. A few weeks ago I wrote about the wide gap between market expectations (Fed Fund Futures) and Fed’s dot plots. The market was still dreaming of doves, I explained, and aggressively calling the Fed’s dot plot bluff.

Well, those dreams came true yesterday as the Fed chose to move significantly closer to the market, shifting its dot plot projections lower in 2015, 2016, and 2017. From the previous 2015 year-end median rate of 1.125%, they moved all the way down to 0.625%. This signifies a shift from 4-5 rate hikes in 2015 to only 2-3.


Market expectations moved lower as well, with Fed Funds Futures now pointing to the first rate hike as far back as October and a year-end rate on only 0.425% (indicating 1-2 hikes). The implied odds of a hike in June, which many had been talking about as possible before the meeting, moved all the way down to 9%.

In a euphoric ramp reminiscent of so many dovish-leaning statements over the past few years, equity markets exploded higher with algorithmic traders keying off the shift in dot plots. If you hadn’t seen the release, you might have thought by this reaction that a 4th round of quantitative easing had been announced. That’s how dependent the market has become on a continuation of 0% Fed policy.

If there was any doubt left that by removing “patient” it actually meant something more hawkish, Dr. Yellen set everyone’s mind at ease in saying the following: “just because we removed the word “patient” from the statement doesn’t mean we are going to be impatient. Moreover, even after the initial increase in the target funds rate, our policy is likely to remain highly accommodative.”

Brilliant. So after over six years of 0% rates the Fed still feels the need to promise to remain highly accommodative if they ever raise rates in the future.

What are they so afraid of, you ask? Isn’t the Unemployment Rate, at 5.5%, lower than in 1994 and 2004 when they started raising rates in the two previous cycles?


Yes, but Fed policy stopped being about economics a long time ago. As I have argued, this is simply about pushing short-term asset prices higher and higher in pursuit of a virtuous “wealth effect” that has yet to occur. It is also about the global currency war and given unprecedented strength in the Dollar over the past 9 months, the Fed apparently was not prepared to wave the white flag.

The Burden of Proof

All of which of course begs the following question which has yet to be asked of Janet Yellen at a post-FOMC press conference. The stock market has already more than tripled since 2009 but this has been the slowest growth recovery in history, both in terms of real GDP and real wages. Shouldn’t the burden of proof be on Fed to explain how continuing their policy of 0% is helping and not hurting the economy?


As Stan Druckenmiller and Bill Gross have argued recently, the Fed’s policies are no longer serving the best interests of the real economy and capitalism. They are simply serving the short-term interest of the financial markets, encouraging financial engineering and speculation over investment in employees and capital. Unfortunately, that is not how you promote long-term growth. As I wrote recently, the Fed cannot serve two masters anymore: it’s either the real economy or boosting short-term asset prices with hopes that will encourage spending (I say short-term because unless you believe that trees grow to the sky, all the Fed has done is borrow returns from the future).

On Wednesday Dr. Yellen and the Fed once again chose to defend the short-term stock market over the real economy. With April now definitively off the table, I suppose we’ll have to wait until June to find out if they have a change of heart.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.


Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.


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