When Janet Yellen delivered her speech on Friday morning the markets reacted to the dovish overtones via buying of SPOOS, GOLD, BONDS and selling the U.S. dollar. The initial action was less muted as the algo headline readers first though Chairwoman’s words mildly HAWKISH, but as key words were measured in context the sense was Yellen was being dovish in not leaning toward a September rate increase. Yellen did give us a significant barometer of data measurement. It seems that 190,000 increase over a three-month moving average is the FED‘s BOGEY. This Friday’s estimate is 180,000, which now puts more pressure on its importance because of September’s FOMC meeting. As usual, Yellen said,”… the economic outlook is uncertain, and so MONETARY POLICY IS NOT ON A PRESET COURSE,” (emphasis mine).
After the market’s adjusted to Yellen’s ambiguity, Vice Chairman Stanley Fischer’s unequivocal HAWKISHNESS replaced the Yellen DOVISHNESS. In a CNBC interview with Steve Liesman, the seldom right never in doubt Fischer said Yellen’s comments are consistent with a possible September rate hike and the Fed isn’t behind the curve. (It was Atlanta Fed President Dennis Lockhart who said the FOMC is set on a course of two more rate hikes before the end of 2016.) There are three meetings remaining–September 20/21, November 1/2 and December 13/14. If there are two rate increases to be had, it seems that September and December are most probable as I believe the Fed will not steal the headlines of the November Presidential election. It seems that Stanley Fischer is trying desperately to find relevance as his January prediction that FOUR RATE INCREASES WERE IN THE BALL PARK. We know that Fischer did not hit a HOME RUN with his January prognosis but is trying to salvage a double.
Some pundits spun the Liesman interview with Fischer as the Fed Vice Chair being the interpreter of Yellen’s words. We don’t know but I will say again what I have maintained all year: If the September FOMC vote is 9-1 Stanley Fischer ought to resign because his mouth is large but his voice is small and he has yet to vote his conscience. The FOMC vote numbers become a much more important measure for Yellen’s control of the Fed. My response to Fischer’s interview with Liesman at the Kansas City Fed’s Jackson Hole conference (from another Kansas iconoclast): “Pay No Attention to That Man Behind the Curtain.”
***In the body of Chairwoman Yellen’s speech were two paragraphs that seemed to directly appeal to our concerns here at NOTES FROM UNDERGROUND. I including both paragraphs because I feel they will be important for discovering profit potential as we move forward in understanding FOMC actions. There is a great deal to ponder and coupled with Harvard’s Jeremy Stein’s Saturday paper presentation in Jackson Hole it will provide a framework for many blogs to come. (H/t to Dan Derose for his comment on Thursday’s post as it fits well with Professor Stein’s analysis.) From Yellen’s speech (note, points in bold are my emphasis):
“Two of the Fed’s most important new tools–our authority to pay interest on excess reserves and our asset purchase–interacted importantly. Without IOER authority, the FED would have been reluctant to buy as many assets as it did because of the longer-run implications for controlling the stance of monetary policy. While we were buying assets aggressively to help bring the U.S. economy out of a severe recession, we also had to keep in mind whether and how we would be able to remove monetary policy accommodation when appropriate. That issue was particularly relevant because we fund our asset purchases through the creation of reserves, and those additional reserves would have made it ever more difficult for the pre-crisis toolkit to raise short-term interest rates when needed.”
The FOMC considered removing accommodation by FIRST reducing our asset holdings [including through asset sales] and raising the federal funds rate only after our balance sheet had contracted substantially. BUT WE DECIDED AGAINST THIS APPROACH BECAUSE OUR ABILITY TO PREDICT THE EFFECTS OF CHANGES IN THE BALANCE SHEET ON THE ECONOMY IS LESS THAN THAT ASSOCIATED WITH THE CHANGES IN THE FED FUNDS RATE.EXCESSIVE INFLATIONARY PRESSURES COULD ARISE IF ASSETS WERE SOLD TOO SLOWLY. Conversely, financial markets and the economy could potentially be destabilized if assets were sold too aggressively.
INDEED, THE SO-CALLED TAPER TANTRUM OF 2013 ILLUSTRATES THE DIFFICULTY OF PREDICTING FINANCIAL MARKET REACTIONS TO ANNOUNCEMENTS ABOUT THE BALANCE SHEET. Given the uncertainty and potential costs associated with large-scale asset sales,the FOMC instead decided to begin removing monetary policy accommodation primarily by adjusting short-term interest rates rather than by actively managing its asset holdings. The strategy–raising short-term interest rates once the recovery was sufficiently advanced while maintaining a relatively large balance sheet and plentiful ban reserves–depended on out ability to pay interest on excess reserves.”
I will end this note by stating that 2013 is far different from 2016 and the Fed is missing a key factor. The BOJ, BOE and ECB are active buyers of debt–almost 200 billion dollars a month–and this could provide a major support to global markets as the FED moves to shrink its balance sheet. It is disingenuous of the Fed to note global headwinds but not provide the use of potential tailwinds from the massive QE programs of other central banks. The Jackson Hole 2016 produced more questions than answers and I promise more work to follow, especially as I juxtapose the work of two economists I respect: Jeremy Stein and Richard Koo. I will be closely watching the Yellow Brick Road as we presume to criticize.