By: David Haggith
Stocks are feeling the love. While the momentum of the stock rally stumbled in the last two weeks of March, the Dow did manage to break ever so slightly above the downward trend line of the high points it established over the past twelve months. (Not enough in my opinion to be conclusive for those claiming the bear market has ended, given trend lines are not absolute enough for such a fractional tick above to prove anything … yet.)
The cause celebre that nudged the market above its past trend was Janet Yellen’s, market-embracing statement that the Fed is going to back off on the frequency of its planned interest-rate increases.
While the market rejoiced that the nation’s foundational interest rate will tickle the zero bound a little longer, Chairwoman Yellen’s words show that the Fed’s confidence in its recovery is waning. The Fed is already backpedaling from the schedule of rate increases it telegraphed back in December for March.
“Most committee participants now expect that achieving economic outcomes similar to those anticipated in December will likely require somewhat lower interest rates,” Fed Chair Janet Yellen told reporters Wednesday after the two-day meeting of Fed governors…. (International Business Times)
One would do well to read that as more than a speed-zone sign on interest rates. It’s more of a “falling rocks ahead” sign. There is, in other words, more possibility in Yellen’s carefully selected words than just a delay in rate increases. She states that moving forward may require “lower interest rates.” She may have just meant “lower interest rates in the future than the amount to which we had planned to raise them,” but her words certainly allow for the possibility that the Fed may actually lower below today’s benchmark, which would be to return to the zero bound, which would mean utter collapse of their recovery in just three month’s time.
Regardless of what she meant, her wording was more dovish than many dared hope for, so it caused a spurt of glee. The Fed knows that investors milk every word for hints of the future, and so it always speaks in minimalist tones, indicating its plans with the smallest of hints. Yet, Yellen chose language that allows for the possibility that the Fed could actually reduce interest rates.
She made this surprisingly dovish statement, knowing full well that any announcement of delays in interest-rate increases strains Fed credibility by contrast to its bold (now seemingly brazen) victory statement about a vibrant, recovering economy only three months ago when the Federal Reserve made its first rate lift-off and laid out its plan for future raises. (Back when they cracked open the champagne bottles to celebrate the success of their nearly decade-long recovery plan.)
This statement that hints of even lower rates strains the Fed’s credibility, and credibility is the only thing that gives the Fed’s money-by-decree any value in the first place. Nevertheless, Yellen twice told the tale last week that the Fed will have to restrain itself from its planned path back to reality … maybe even retreat.
The Federal Reserve didn’t just change course; it appeared to change directives
In explaining this change of course to a lower trajectory, Yellen indicated that the Fed primarily fears global economic difficulties. One article I read afterward said that the Fed must now see itself as the global central bank if it is setting policy based on concerns about the global economic downturn, as if it is the Fed’s job to do something about that.
I think, however, that misses her real point. The Fed’s concern may not have been so much to save the world from a downturn, but to save the Fed’s “recovery” from the world. That, too, is a new perspective for the Fed, which has spoken for over a year as if the United States was largely immune to the developing global collapse.
Even though the Fed gets its two mandates (establishing a stable, minimal inflation rate and a strong jobs base) from Congress, I wouldn’t say a new mission of being the world’s central bank is unlikely. The world’s central bankers did, after all, recently emerge from a G-20 summit where investors were expecting an announcement of some unified plan by central banks to save the failing global economy. Investors were a little dismayed by the silence. Moving to a lower-interest target could have been the plan, and the Fed would have to be silent about it because it is not a directive congress has given. It can justify playing a part in such plan, however, if it needs to save its own mission from the collapsing world.
Whether they are saving the world or saving their own plan from the world, this global concern, she said, weighed larger in the Fed’s mind than any concern about rising inflation, even though she noted inflation is picking up. Under old Fed policy the fact that inflation is rising to where the Fed wants it, even after it raised rates, would have been reason to stay on the predetermined path of tightening, especially since the Fed’s other objective — jobs — also looks solid (in terms of those gauges to which the Fed actually pays attention).
I think it’s pretty clear the Fed needs to help in the plan for saving the global economy in order to save its plan from the global economy. And that is exactly where I’ve said the US would find itself this year. Notice how quickly the Fed had to revise its December hopes, upon which it based the end of zero-interest rates. (Just as I said back in December it would have to due to global pressures.) The revised policy is “lower and slower.”
With former Fed board member, Richard Fisher, having declared barely two months ago, “We front-ran the market,” it’s clear the Fed has another non-mandated directive — the goal of creating and maintaining bull markets.
It’s no wonder, then, that Grandma Yellen smiled brightly as she offered her children a candy-coated dream of “lower interest” again. It is equally no wonder that …
Within minutes of her remarks, risk assets rose, government bond yields fell, the dollar weakened and the VIX declined. (Newsmax)
That was effective! It was almost as if she announced “pudding” to group of chubby toddlers. Grandma Yellen seems to have acknowledged that the Fed may even have to go back to feeding its recovery — a fat little child that never did put on any muscle.
She argued that the Fed had not run out of policy ammunition and stressed the need for careful policy gradualism within a cautious approach overall — music to the ears of markets that have been conditioned to depend on the Fed to suppress financial volatility and push asset prices higher…. Consequently, stocks and corporate bond prices rose within an overall rally for risk assets.
Fed to Market, “Come to Mama.”
With the Fed being the market’s only nursemaid, as politicians do absolutely nothing for the economy, the market’s co-dependancy on Fed stimulus could be counted on to cause some momentary boost. While the alacrity of the response was impressive, the size of the response must have been as disappointing as a failed orgasm.
The greater revelation, then, is not that the market rose but that it rose so little. The market did move above its downward trend but by such a flaccid amount, given Yellen’s announcement of more stimulus. One should be more surprised by the small spurt of enthusiasm, than by the fact that Yellen nudged the market above trend.
Co-dependancy works both ways. For the Fed, it means the Fed is dependent upon the market’s rise to prove its lovechild is a viable success. They are still front-running the market in ways that were once unthinkable. They do this by clearly telegraphing in advance what they hope to do for the market. That tells investors where to place their bets for success and arrouses the speculators. In the good-ol’ days, the Fed tried to say very little about what it would do so that monetary policy would not drive the market.
Those days are long gone … it appears for good. Ben Bernanke warned us this change was coming when he talked about the need for greater communication transparency by the Fed. You cannot front-run the market to “create a wealth affect,” as Richard Fisher also said, without letting the market know what you plan to do.
“The market still loves dovishness without apparently worrying too much about what is causing that dovishness,” [said Wouter Sturkenboom, strategist at Russel Investments]. (Marketwatch)
Concern about what is causing the dovishness would mean concern that clearly the Fed sees its recovery as failing, or it would not change course, and that should be bigger news than the arrival of more candy from the sugar mama. The market, however, is addicted to the sugar.
All of the world’s politicians failed to respond
I have to give Yellen some credit, though, when she described
Politicians who repeatedly fail to take advantage of the time the Fed buys for them, withholding a much-needed comprehensive policy response to the cyclical and structural challenges to the U.S. economy….
As much as I criticize the Fed, the greatest failure in US history has been on the part of all Democrats and all Republicans to accomplish anything for the betterment of the US economy — anything at all. Neither party has any vibrant visions. Neither demonstrates any understanding about what is wrong with the economy. Neither can give up its addiction to debt. Neither has done much to bring the banksters who created this mess to justice.
Both support their cronies on Wall Street at every turn. Both are more concerned that the other party may get credit if any good plan goes into place, and both are willing to sacrifice the entire United States in order to make sure that never happens.
The rest of the leaders of the world have done no better in their own countries, save maybe in Iceland where banksters were punished.
I’d be cautious about taking this small rise above the downward trend with too much seriousness, given how pathetic the lift was for how dovish the news. Let’s see where the market goes now that the initial burst of relief among the co-dependant is over.