Today was the proof positive that the FOMC is under the command and control of Chair Yellen. As they said about Maggie Thatcher, “This lady is not for turning.” Yellen is a lonesome dove–if we bother to listen to the chirping from the baby hawks (EYAS in the bird world). It is these EYAS who ultimately say YES to everything the Mother Dove asks. There have been very hawkish speeches from FED governors and presidents during the last six weeks but still the vote at the MARCH FOMC was 9-1. There may be many EYAS but Yellen rules the roost. If Stanley Fischer had any sense he would resign and head back to academia where he carries far more weight.
Yellen told all concerned that the FED is worried about the headwinds from the global economy and therefore will be cautious in raising rates. In fact, Yellen invoked the Fed’s third mandate today: The world economy and the strength of the dollar as rationales for being cautious on prematurely raising interest rates. Yellen mentioned global concerns nine times, including the reference to dollar strength and developments in China. I have argued for a long time that Yellen is first and foremost a labor economist and would err on the side of allowing wages to increase before embarking on an interest rate tightening cycle. It makes perfect sense for Yellen to invoke the third prong of the FED‘s policy–international developments–in order to silence the likes of San Fransisco President John Williams who continues chirping about the strength of the U.S. economy.
Yellen’s assertiveness on the need for lower for longer spurred a rally in the SPOOS, BONDS, GOLD and all the foreign currencies. Also, the 5/30 and 2/10 curves steepened as the recent increase in shorter yields were clawed back. Going into the second quarter it will be important to watch how the yield curves perform. The curves have flattened during the first quarter as the market was anticipating greater Fed action–according to the dot plots–or reacting to a looming slowdown in the global and U.S. economy. If the curves were to resume flattening following Yellen’s speech then the fear of a slowdown would be paramount and the equity markets will struggle to rally.
This will be an important indicator going forward but of course day-to-day action will always be driven by the buying power of the ECB and BOJ so trading will have to be forever vigilant. Look for opportunities provided by central bank interventions. I believe the true sense of the Yellen Fed was revealed in these two sentences: “If economic conditions were to strengthen considerably more than currently expected, the FOMC could readily raise its target range for the federal funds rate to stabilize the economy. BY CONTRAST, IF THE EXPANSION WAS TO FALTER OR IF INFLATION WAS TO REMAIN STUBBORNLY LOW, THE FOMC WOULD BE ABLE TO PROVIDE ONLY A MODEST DEGREE OF ADDITIONAL STIMULUS BY CUTTING THE FEDERAL FUNDS RATE BACK TO NEAR ZERO,” (emphasis mine).
So the FED is trapped by its own efforts and therefore has to remain easy longer just in case the global economic headwinds slowdown the U.S. economy. The FOMC‘s insurance policy is remaining steadfast. It’s better to remain in place than risk having to backtrack with very little room to maneuver without going negative on rates.
Also, wage inflation has been slow to take hold and as this year’s anti-Davos elections around the globe reveal the workers of the world need a raise. Trump and Sanders reflect the writings of Tomas Piketty in the R>G for far too long. If things are too good in the U.S. we will always have Tokyo, Beijing, Paris, Madrid, Rome, Athens and Rio. It seems that Yellen is concerned about the stickiness of wages and in fact it is NEHRU not NAIRU. A billion Indians will continue to exert downward pressure on wages and the model for the NON-accelerating rate of unemployment has less reliability in a global economy. Your move, Mr. Fischer.Tags: Fed, Fischer, FOMC, Yellen, yield curves
March 30, 2016 at 5:27 am |
In order to raise rates the Fed is waiting for a perfect world without any economic headwinds, which might never occur. Core inflation is already trending up (2.3%). So higher wages might not even make a difference in terms of purchasing power. Those higher wages might never come either, since corporate America has to show profit growth in a world of low (if all) revenue growth.
They are scared to death that raising rates wil cause a reverse wealth effect via the stock market. Once hostage, always hostage.
March 30, 2016 at 6:10 am |
Even before yesterday’s speech from the Chair, it was apparent from Fiecher’s lack of a dissent from the March statement that he has thrown in the towel. Shame he doesn’t have the conviction in private that he espouses on TV and in front of the microphone.
March 30, 2016 at 7:43 am |
Seems to me central banks are failing to achieve their goal of growth, I really don’t understand the point of view of hawks aside from they must believe a washout is necessary and the sooner the better?
That is, I’m under the impression a washout is in store.