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The Federal Reserve Board --The Adults in the Room

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If you asked the average person -- or even the average hedge fund manager (although they all probably think they're above average in a Lake-Wobegon sort of way) -- how they feel about the Federal Reserve's latest economic projection that trimmed its estimate of 2014 US GDP growth to a range of 2.1-2.3 percent, down from an original 2.8-3.0 percent projection, they would probably say that's not so hot -- not a recession, but quite depressing nonetheless.

On the other hand, if you asked the same person how they would feel if GDP growth were to average just over 3 percent for the rest of this year, including the figures for the three quarters ending June 30, September 30 and December 31, they would feel a lot better -- not a "boom," but certainly a consistent breakout from the inconsistent pace of recovery from the Great Recession of 2007-09.

Bad news vs. good news? Not really, since both statements are in fact true and reflect the same simple arithmetic. The Fed's revised projection for GDP growth as of end-December 2014 vs. 2013 takes into account the generally unanticipated 1 percent decline in first quarter GDP caused by the incessant bad weather over a large swath of the country during that period. Accordingly, to come in at 2.1-2.3 percent for the year, the economy has to pick up steam at an average just slightly above 3 percent for the final three quarters. Do the math: feel better, be happy.

The equity markets seemed to understand the arithmetic as the Dow Industrials rose by 98 points and the S&P 500 hit another all-time high after the Fed's statement and Chair Yellen's press conference, where she also opined (in answer to a question that implied investors were maybe too complacent about the endurance of Fed low interest rate policy) that current stock prices did not seem to her out of line with historic norms relative to earnings or dividends. The point about "complacency' is an important one. I suspect Chair Yellen knew she was being baited by a question designed to trick her into giving investors cause to dump stocks in a panic induced by an 'official' confirmation of a certain market rumor prior to the meeting that the Fed was concerned about an overheated equity market and would do something surprising to tamp down speculation, perhaps with a hint of an earlier than expected interest rate hike. As CNBC put it the morning of the Fed meeting, the market's new game of guessing when interest rates would rise would spread like the canary in the coal mine from current speculation about the Bank of England's intention to the Fed's.

Such market buzz certainly served the interest of hedge funds stuck thus far in 2014 with decidedly below average returns, either because they bet against bonds or stocks or both. A panic sell off for fear of a Fed "surprise" would give them a chance to cover their shorts, and even buy back into securities they knew would bounce back at cheaper prices. And they had a few grains of sand to throw in the market's gears just prior to the Fed meeting.

In the case of the Bank of England, its Chair had expressly hinted that rates there might well rise sooner than the market expected. The Fed's Yellen, however, had taken steps to walk back her March remarks about a possible six-month gap between the end of bond buying expected this fall and the beginning of U.S. rate increases (an earlier timing than the stock and bond markets expected). But Fed member William Dudley of New York had remarked publicly about his concern that low market volatility meant investors were taking too much comfort, and too much risk, and some commentators linked this complacency to Fed policy stability in terms of keeping rates low -- an ironic outcome certainly, as more Fed transparency was seen to be leading the market astray with insufficient concern about recent upticks in inflation measures.

The Fed and Chair Yellen made short shrift of these pre-meeting market perturbations. The Fed's official statement showed no particular concern as to the recent inflation data, and Yellen referred to it as "noisy' in her press conference and thus not a cause for the Fed to alter its outlook as to the timing for interest rate adjustment -- as to when, she summed it up; "it depends" on developments in the economy.

This of course is what the Fed has been saying all along, while self-interested commentators try to bend or twist Fed-member words into calendarized commitments. Remember the famous "September taper" commencement that wasn't? Sure made and lost some market players a lot of money along the way based on completely false assertions that the "Fed said it" -- which it didn't. In the case of the most recent rumor-mongering about a Fed "surprise" interest rate hike to jack up market volatility and drive down supposed stock speculation (and thereby help traders who are short and wrong), Yellen's indirect but clearly intended denial of a stock bubble surely took the wind out of the true speculators' sails.

As one commentator put it right after the Fed meeting: it's time to stop expecting a surprise from the Fed when it has made two themes perfectly clear. First, it will do what it takes to get employment back to more normal levels and, second, that its timing of eventual interest rate normalization "depends" on a broad range of measures -- not just inflation -- of how the economy is performing.

Interestingly, Yellen and the Fed may have finally found a way to communicate most transparently about the very uncertainty surrounding its projections and why it will continue to fight efforts to formulize or calendarize the future course of interest rates beyond the principles it has laid out.

By publicly acknowledging this uncertainty and the diversity of views within the Fed by revealing the broad range of 2016 interest rate projections (from 0.5 to 4 percent) among the Committee members around the "central tendency" -- which it lowered to below 4 percent (see my prior blog -- If 2% Is The New 4%) -- the Fed made clear that the only "surprise" for the markets would come from the economic data, not from the Fed. Moreover, this level of transparency about diverse individual member views may have helped Yellen to achieve unanimity around a consensus policy. Today's Supreme Court can only dream of speaking with one voice so credibly.

Markets crave certainty, of course; but in the immortal word of the great economist Mick Jagger, "You can't always get what you want, but if you try sometime, you just might find, you get what you need." What the Fed speculators got from Yellen was The Big Chill.

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.