Oil Plunge and Janet’s “Considerable” Dilemma


Considerable adjective: large in size, amount, or quantity “Considerable” is the word of the week, as all eyes move from plunging oil markets to the Federal Reserve. This week, central bank officials gather for their last policy confab of the year. With bond buying now done and the economy expanding, the big question is: how might the Fed alter its policy statement to prepare investors for the inevitable increase in short-term interest rates?

Previously, the Fed has said that it would leave rates at near zero for a “considerable time,” but with the labor market improving and the economy gaining strength, there’s a case to be made to shift that language to a word of phrase that might equate to a shorter period of time. Analysts at Capital Economics have turned back the clock by a decade to see what terminology officials’ used ahead of the tightening cycle that began in 2004. “Back then the Fed went from saying that low rates would be maintained for a ‘considerable period’; to the FOMC would be ‘patient’ in removing accommodation; and then to accommodation will be removed at a ‘measured’ pace.”

Here’s how the Fed’s words translated into time:

  • Considerable: 6 - 10 months
  • Patient: 2 - 5 months
  • Measured: one month

OK, so remember back in March when Fed Chair Janet Yellen had that woops moment at her first presser? That’s when she let it slip out that the Fed would raise rates “something on the order of around six months” after QE ended. Since QE concluded at the end of October, something on the order of six months would bring us to April 2015. Conveniently, there is a policy meeting on April 28-29, 2015 so that might be a fine time to start the process.

HOLD YOUR HORSES! The recent acceleration of the oil market sell-off may put a wrinkle on the “considerable” to “patient” exchange. While the 46 percent drop in crude oil from the June highs amounts to about $100 per month savings for US consumers, there are some analysts who believe that crashing oil is the canary in the coal mine for the global economy.

Until the last week or so, most have thought that the oil story was one part increased supply and one part tepid demand, but what if the balance is tipping in the wrong direction? In that case, falling oil has more to do with a big slow down in Chinese, European and Japanese economies than with the growth of U.S. production. In fact, that weakening growth prompted OPEC to predict that demand for its oil will hit a 12-year low next year.

If the world is really slowing down, then can the U.S. remain an outlier of growth for much longer? Investors answered that question with a “NO WAY” last week and sold stocks to underscore the point. After all, if you’re sitting atop healthy gains for the year (the S&P 500 is still up 8.3 percent YTD) and you think the globe is slowing, a reasonable response is to lighten up on your equity positions and see how things unfold. The Federal Reserve may also opt to maintain the status quo on its wording, at least until the first meeting of 2015.

MARKETS: The Grinch stole the Santa Claus rally, at least for a week! Despite seeing the worst week of 2014, the S&P 500 remains within 4 percent of its all-time high.

  • DJIA: 17,280, down 3.8% on week, up 4.2% YTD (worst week since Sep 2011)
  • S&P 500: 2075, down 3.5% on week, up 8.3% YTD (worst week since May 2012)
  • NASDAQ: 4653, down 2.7% on week, up 11.4% YTD
  • Russell 2000: 1152, down 2.5% on week, down 1% YTD
  • 10-Year Treasury yield: 2.08% (from 2.31% a week ago)
  • January Crude Oil: $57.81, down 12% on week (lowest close since May 2009; down 46% from June peak)
  • February Gold: $1,190.40, up 2.7% on week
  • AAA Nat'l average price for gallon of regular Gas: $2.56 (from $3.24 a year ago)


Mon 12/15:

8:30 Empire State Manufacturing

9:15 Industrial Production

10:00 Housing Market Index

Tues 12/16:

8:30 Housing Starts

FOMC Policy Meeting begins

Weds 12/17:

8:30 Consumer Price Index

2:00 FOMC Policy Decision/Statement

2:30 Janet Yellen Press Conference

Thurs 12/18:

8:30 Weekly Jobless Claims

10:00 Philadelphia Fed Survey

10:00 Leading Indicators

Fri 12/19:

10:00 State Unemployment

10:00 Kansas City Fed Manufacturing