What It Means to Be "Patient"

Federal Reserve Chair Janet Yellen testified before the Senate today. Like other Fed “happenings,” such as the Federal Open Market Committee (FOMC) minutes released earlier, it was a much-anticipated testimony.

Broadly speaking, the conclusion hasn’t changed: The U.S. economy is growing modestly, employment is growing and inflation isn’t picking up. The Fed will likely tighten its monetary policy at some point in the not-too-distant future—but we don’t know exactly when. And tightening might not have a meaningful impact on 10-year Treasury rates.

If all you want is a punchline, there’s no need to read any further. Stop right here and go back to your day job. On the other hand, if you depend heavily on what the Fed chair uttered in this semi-annual monetary policy (or “Humphrey-Hawkins”) testimony, there were three points to mull over.

1. Yellen is reclaiming more flexibility to decide about future rate hikes

Yellen did a decent job of extricating herself from a self-created problem. Recall that earlier in the year, she had provided very specific guidance on use of the word “patient” to mean that the Fed would not decide to raise rates for two subsequent meetings. In hindsight, that was ill-advised guidance, because it effectively boxed the Fed into a problem for no benefit. At this point in the cycle, if economic data is strong, the Fed would likely want to raise short-term rates in June. But if it isn’t strong, the Fed would probably not want to do anything. By defining the word “patient” in such clear-cut terms, the Fed reduced—rather than enhanced—its flexibility on policy decisions. Former Fed Chair Alan Greenspan, the master of obfuscation, was said to be groaning loudly when that happened.

Today, Yellen got herself out of the box she had created. Essentially, she told us the Fed would omit any reference to “patience” in the next meeting—but that this omission wouldn’t necessarily mean that the Fed would raise rates in June.

2. Yellen shared a blunt perspective on the international economy

Yellen was unusually candid about the Fed’s outlook on the international economy and its potential impact on the U.S. economy and monetary policy. At the end of the day, U.S. unemployment has reached such a low level that the international economic considerations might not play a role in policymaking. Nevertheless, Yellen made it clear that international developments and correspondingly lower inflation would be meaningful drivers of U.S. monetary policy.

3. The Fed remains uncertain about future monetary-policy decisions

Finally, Yellen effectively painted the same economic picture as she had in previous occasions. But at the same time, she made it clear that the Fed cannot anticipate what its future policy—which is all data-dependent—will be.

Ultimately, Yellen didn’t seem to change anyone’s mind by the end of her testimony. If you previously thought recent U.S. economic data was strong enough to merit a rate hike, you probably still believe that. All the same, if you thought there was no rush to raise rates, you’re likely holding on to that view. In short, listening to the testimony was a colossal waste of everyone’s time.

As I’ve said before, don’t pay much attention to the Fed at the moment. The Fed will ultimately do whatever it has to do—but it won’t have much of an impact on financial conditions or longer-term rates.

Read more News and Insights from OppenheimerFunds