Going into the Federal Reserve Board's Open Market Committee meeting of March 18-19, market expectations had coalesced around the expectation that the Committee would begin to change its "highly accommodative" monetary policy -- i.e., increase its target for the overnight "federal funds" inter-bank borrowing rate from its current level of zero to one-quarter percent -- not before the second half of calendar 2015. Any change in direction toward an earlier increase from this expectation on the Fed's part, which was the distilled product of the statements and minutes of the last several committee meetings through January of this year as well as the published views of incoming Chair Janet Yellen, would accordingly be viewed as an unwelcome surprise by the bond and stock markets, sending bond yields markedly up and prices of both bonds and stocks significantly down.
The markets reacted tamely at first to the committee's end of meeting statement that reiterated their intention to maintain for a "considerable period" its highly accommodative monetary policy after it completes its "measured" tapering of its bond purchase program. It also noted that both the tapering and any subsequent rate increase decision would be dependent on both incoming data and forward outlook for multiple factors including progress toward maximum employment and a 2 percent interest rate, as well as overall economic conditions. There was no express or even implied hint in the statement that was seen off the top as altering market expectations for a rate increase sooner than the second half of 2015.
However, during Chair Yellen's first post-meeting press conference, a Reuters reporter asked her to clarify what she meant in response to an earlier question that the tapering would be on course to be concluded by "next fall" if the Fed's current consensus estimates of near-term economic activity were realized. The Chair first made clear that "next" actually meant fall 2014, not fall 2015. The reporter than went on to press Yellen on what exactly the term "considerable period" meant when the Fed used it to suggest the period of time it would wait after tapering was completed before starting to raise the federal funds benchmark interest rate target.
After first asserting that the term was hard to quantify, Yellen went on to say that it would be like "six months"' or some such but that in any event, any such decision would depend on the economic circumstances at the time, consistent with the committee's (unsurprising) post-meeting statement.
Despite Yellen's evident caution and discomfort in expressing any specific quantitative definition of "considerable period," the stock and bond markets chose to take Yellen ultra-literally about the six months and turned suddenly and violently downward, with equities down over 200 points within just a few minutes. In short, Yellen was interpreted -- against all evidence to the contrary in the Fed's statement and in all the rest of her answers -- to mean that the Fed would start raising interest rates in the spring of 2015 -- many months earlier than the markets expect.
For short sellers, Yellen's modest "Biden moment" gaffe -- bending over backwards to help out a reporter -- was a gift from the gods. It morphed into another weapon with which to panic shareholders and thereby drive market prices quickly down to where they could score later profits buying back at those lower levels, and reaping the rewards when the broad markets come to their senses about Yellen's remarks.
After the markets stabilized (but distinctly in the downside) and closed for the day, CNBC gave their short-seller friends yet another biased boost by posting a story that actually led with a headline that the Fed had changed interest policy and "embellished" (some might say misquoted) Yellen's actual words to the effect that she "said interest rate increases likely would start six months after the monthly bond buying program ends." The CNBC story went on drill home the short-sellers point by specifying that "if the program winds down in the fall, that would put a rate hike in the spring of 2015, earlier than market expectations for the second half of the year."
To reach this explosively short-friendly conclusion, the CNBC story, besides just twisting Yellen's words, had to also ignore some basic math. Since the Fed is committed to a "measured" tapering program of $5 million decrease in each of its mortgage and Treasury securities purchases per meeting, it will clearly take until the Fed's December 2014 meeting at the current pace to fully announce the wind-down of monthly purchases over the remaining six meetings -- namely the end of fall, not the beginning (the October meeting). The tapering then would actually end only in January 2015, and six months from then would be in the second half of 2015 -- no change in interest rates, no change from market expectations.
Yet CNBC chose to ignore this math and hear Yellin as meaning early fall (the October meeting), the only way to get to its "Spring Interest Rate Increase" scare-line. CNBC's one reliable Fed reporter, Steve Liesman, even pointed out this math on the air the first chance he got in an effort to debunk his own network's emerging story line. But CNBC went ahead with its false headline and story anyway.
When a network ignores its best Fed reporter's conclusion and publishes a contrary story that also fails basic math, one has to assume that there are considerations other than objective journalism at work.
We have seen this distorted, pro-short playbook from CNBC before. Last summer, the network led the charge for the 'taper tantrum" that took stocks down several hundred points into when it interpreted Chairman Bernanke's late springtime intimation of the start of tapering "later this year" as meaning at the Fed's September 2013 meeting (rather than December, actually more consistent with both market expectations and the data the Fed was reviewing). When September came and went without a taper, those who took the market down and then bought into the manufactured market swoon made fortunes.
Let's be clear. Higher interest rates are coming in 2015, and most certainly if the economy performs better than expected. A majority of Fed officials forecast a 1 percent rate level by the end of 2015. But even that only assumes three second half increases of 25 basis points each. It strains credulity to assert, as CNBC did, that the Fed really changed its interest rate policy on March 19 away from what markets were expecting.
Even CNBC seemed to realize its initial story was beyond the pale. It rather quickly took it off its website and found an outside commentator who agreed with its "policy change" conclusion to quote along the same lines. The Internet, however, has a photographic memory, and the familiar CNBC theme that there is yet another cause for a market "correction" was now afloat in the market waters. Even the NBC nightly network news picked up the faulty CNBC assertion that the Fed had changed policy toward a quicker increase in interest rates.
When you want facts, listen to Yellen herself, and tune in to Liesman. Otherwise, proceed at your own risk with CNBC.
Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University
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.