Investors lose patience with cautious Fed

March 18 00:09 2015

The Federal Reserve has done everything short of a Jimmy Kimmel appearance to tell investors it will start raising interest rates again this year after six years in the monetary wilderness. Investors are still wholly unprepared. The results will be chaotic, possibly catastrophic. And they could begin Wednesday. That’s when Fed’s rate-setting committee is widely expected to remove a key word — “patient” — from the statement it will issue following a two-day meeting. The word is code for a promise not to raise rates, now just above zero, during the committee’s next two meetings. So June 17 may be the day of reckoning.635621931132204727-Online-Federal-Reserve-0128

Fed officials take pains to explain that “patient” is not just a code word, but a theme for their broader strategy of bringing the U.S. monetary cycle back to normal after the massive shock of the financial crisis and years of abnormal Fed maneuvering to push down rates through purchases of nearly $4 trillion worth of bonds in the open market. The unprecedented nature of the crisis and the Fed’s response means that its attempt to return to normal is also untested. That’s why uncertain markets are straining for some sort of certainty by focusing on the when, and not the how, of the plan.

The shocking surge in the dollar against the euro these past few months — to the delight of American tourists visiting Europe and the frustration of American companies exporting to Europe — reflects in part expectations for higher rates. The continued rise in U.S. stocks also portends a growing economy that eventually would require rate increases to slow it down. Market expectations as investors place their bets on rate-hike timing show that no matter when the Fed acts, there will be extreme volatility, as the entire betting table turns over to prepare for the next move. The roulette wheel will be reset.

Although Fed officials promise a cautious, tempered return to normal, the amount of money riding on this dictates that in the daily flow of global funds, it will be anything but. Trading strategies that seem as if they’ve been in place for a generation, such as buying bonds or exchange-traded funds tied to bonds, will need to be altered. Stocks will swing. Gold may stage a comeback. The rate move will be a starting gun to a new era that investors cannot be ready for until it starts. The Fed has every reason to keep delaying the inevitable. Inflation is running too low for comfort. Falling oil prices, for all the good they do at the pump for consumers, have costs tens of thousands of jobs in the U.S. energy sector and are limiting prospects for the higher inflation the Fed wants. There is still no real sign that wages are rising, and companies remain tightfisted with their cash hoards.