Fed Policy: 2015 May Be EXACTLY Where Ben Bernanke Wanted to Be

It’s really hard to pinpoint a proper timeline for Fed Policy.  In a perfect world and situation, the Committee would prefer to sit in the background and not have an influence.  But after the 2008 global financial collapse, that could not be done easily.  The dilemma created from the financial crisis was a major puzzle:  go deep with an aggressive policy or wait and see how things would shake out.  The latter was a mistake made in the 1930’s that helped extend the Great Depression.   When they started on their journey of healing the financial markets from a very steep decline and potential depression, the Fed was committed to do whatever was necessary to steer clear of a disastrous outcome.  The World was watching and waiting to follow.

At first, the idea was to be decisive with a time line.  However, the deepness of the crisis required extended time, and their language in statements and minutes eventually became ‘accommodation will end at some point’.  Of course, their eyes have always been on the data (and the Fed has TOLD us this), and that has been pretty good of late, and actually throughout 2014.

The Fed’s dual mandate of price stability and achieving full employment took quite a bit longer to accomplish after the dismantling of both during the 2008 financial crisis.  Chairman Ben Bernanke, a student of history (namely an expert of the previous Depression Era, circa 1930’s) was the architect behind current policy – keeping rates low for as long as needed, buying bonds to achieve the goal and allow the job market time to repair by shoring up confidence in financial markets and thus confidence around the world.

Who really knew how much stimulus was needed or for how long.  The Fed embarked on QE not once, not twice but THREE times – not putting a time limit on the last effort.  Many have argued the policy was unusual, excessive and unnecessary – but I would prefer to be where we are at today (recent 5% GDP growth) than where we might have been without some divine Fed intervention.

But as we ended 2014 the sun set on QE and that portion of Fed Policy is history.  However, we still have extraordinarily low rates and the big talk for 2015 is not if but when those rates will start to rise.  Normally, the Fed gets hawkish when inflation expectations have risen higher than they would like.  Today that is not the case (inflation is low, perhaps even too low).  Admittedly, extreme policy accommodation is probably not needed and could be quite harmful if in place for too long.  The Fed is aware of the dangers here and continues to calibrate as necessary without setting off alarm bells to markets.  The entire World is STILL watching and will pivot off Fed Policy.

So, in 2015 we have some ideal conditions that MAY allow the Fed to start retreating from excessive policy accommodation to a more normalized environment, but that will likely be a longer process than usual (maybe 2-3 years out).  Given the damage inflicted the Fed will use EXTREME CAUTION AND CARE and all the time necessary to be sure they are not hurting the recovery as they start raising rates.  But with good growth in GDP, lower commodity prices, solid improvement in the jobs market (with more needed) and other key areas healing the table is set for the economy and markets to decouple from the Fed – at last.  And that will be a great moment – mission accomplished.

Bob Lang, Senior Market Strategist and trades various option trading newsletter Explosive Options. Check out the updated site and the Explosive Options Pro Chat Room!