From the article, “Yellen’s Conundrum: Forestall Monetary Mayhem Or Release Political Pandemonium” To wit:
“Regardless of who wins the election, one thing is certain: the vote that takes place in December within the confines of the Eccles Building cast by a dozen un-elected, Ivy Leagued, academic bankers whose combined real world business experience is near nonexistent (less for that read in some wood-paneled library) will decide monetary policy that will have more implications for not only the U.S., but the world as a whole. Effecting not only the global financial markets, but quite possibly, the entire international political stratum as well. And the new President (as well as every other world leader) will have to adjust to that outcome.”
On Wednesday The Federal Reserve raised interest rates. The presumption of it happening was as close to full consensus as one can get. Personally, I thought there was a chance (as slight as it was) they may do what they have done countless times over the past years. i.e., Sternly jawbone the esoteric as they once again kick-the-can.
The reasoning for it was simple: For once – conditions were showing – one final pause may actually be prudent, giving them cover to do just that. And since it was smack-dab in the middle of the U.S. presidential transition time period, it could be argued, if there was ever was a legitimate reason to “pause,” this was one of the best excuses if there ever was one.
As I’ve iterated before: With a new administration about to be seated (in-particular an anathema to earlier projections); data movements in the Fed’s favor of stated objectives (albeit ever so slightly); the $Dollar had gained tamping down any immediate worries for any runaway inflation concerns; oil remained stable-ish; and under the current barrage of treasury holdings being dumped as many frantically defended their currencies, China in-particular, still appeared to be defending and keeping at bay any sudden devaluation scenario from happening and its knock-on contagion effects, etc., etc.
So, to use a baseball term: Why cause a forced error? Or, in other words: Why chance the risk where the odds for needing a possible quick reversal has more of chance to increase, rather than decrease? (i.e., A hike is most assuredly going to put far more pressure on the Yuan where a sudden “oh-oh” moment seems precariously poised to happen with just one unanticipated wrong move.
Sure there would be howls, but those were going to be there no matter what. For the Fed. has waited far too long as to be on any prudent side, or idealized “real” path of normalization.
The problem all that waiting has created was to leave the Fed. ever stuck within the confines of choosing between the lesser of two evils. i.e., Raise purely for the sake of monetary prudence or credibility. Or, wait purely for the “markets” sake, or stability.
Again, just to make this point, in my opinion: For the first time in years, the Fed. waiting one last time actually had more of an acceptable argument, or criteria than any previous. Especially given the sudden surge in what many have alluded to as the return of the “reflation” trade. After all, it appeared that finally the Fed’s long bemoaned calling for “fiscal” help may have – in fact – actually arrived.
Then came the announcement.
The rate hike was all but baked it, granted. But, not any additional signaling of hikes (via the Dot Plot) above two. Let alone, a more “hawkish” tone than almost any conference in recent memory.
As a matter of fact, the tone expected from the Fed. Chair was thought surely to be laced with ever-the-more dovish tones as to not upset, or spook the “markets.” After all, the last time the Fed. hiked? Less than 30 days after implementation there was a need for a gaggle of Fed. members to scramble to any camera, microphone, or venue to assure the “markets” the Fed. was still ready, willing, and able to turn the spigot back-on-full should it be needed.
For those who don’t remember (or just refused to open their statements.) That’s when the markets suddenly, and unrelentingly fell straight down a mere 14 days later from what many dubbed the Fed’s “mission accomplished” press conference. In just another 14 trading days – the S&P 500™ went from just under 2100 – to just above 1800. And the DJIA™? It went from just under 18K – to just above 15K. Remember then? Good times, no?
But it was at the press conference when things suddenly went from “It’s all baked in!” to “Wait….what?”
You could hear the head-scratching over the microphones as one questioner after another tried to reconcile what Ms. Yellen was now implying as Fed. guidance, or interpretation from what she (e.g., The Fed.) had prior.
There were so many “Wait…what?” moments I can’t remember them all. Yet, there were a few in-particular that stood out above the rest.
First, there was the questioning of the elevated path in the Dot Plot. (e.g., going from 2 to 3 expected rate hikes in 2017) The reasoning seemed not only convoluted, but the declarative reasoning that where the employment figures now stood was (paraphrasing) “Fine in their view.” That – was utterly – jaw-dropping.
Let me put it this way (again paraphrasing as I and others inferred): The Chair of the Fed. made it a point in her defense of raising rates at an even faster pace was to regard the Unemployment rate going down from 4.6 currently to 4.5 was not only acceptable, but adequate. However, anyone with half a brain knows for that number to have fallen to these levels means – even more people have to not only lose jobs, but also remain out of work. (i.e., We’ve climbed from 94 to 95 million currently out of the labor market. And still climbing.) To any of the 95 million, I wonder how “adequate” or “in line” it is too them?
Then there was the exchange when the question (again from a scratching-their-head in bewilderment participant) arose about what appeared to be a far more “hawkish” tone emanating from the meeting, when it wasn’t all that long ago (60 days give-or-take) the Chair herself was seeming to signal for the allowance of inflation to run a little hotter, or longer than the textbooks might imply. e.g., Her prior discussion just this past October on the benefits of a “high-pressure economy.”
Here was where Ms. Yellen seemed to become uncharacteristically more animated as to defend that she was not stating, nor should anyone infer that she was calling for such to be implemented.
It’s a fair point. However, with the Fed. engaged in forward guidance to a fault, and knowing every single syllable, let alone word is scrutinized for “intent.” The defensive posture falls a little flat. Don’t take my word for it, you can judge for yourself. Here’s how Reuters™ reported it. Remember, a mere 60 days ago. To wit:
“The Federal Reserve may need to run a “high-pressure economy” to reverse damage from the 2008-2009 crisis that depressed output, sidelined workers, and risks becoming a permanent scar, Fed Chair Janet Yellen said on Friday in a broad review of where the recovery may still fall short.
Though not addressing interest rates or immediate policy concerns directly, Yellen laid out the deepening concern at the Fed that U.S. economic potential is slipping and aggressive steps may be needed to rebuild it.”
Sure sound like less than 30 days prior to the election Ms. Yellen (i.e., the Fed.) was far more dovish (e.g., “deepening concern”) with the current state of economic exuberance than she was on Wednesday just 30 days after it. So much for “forward guidance,” yes?
One could argue (and I’m of the opinion that arguing will begin in earnest should the markets suffer anything resembling the last hike) that the Fed. was positioning for (If not why even bring up the idea of “high-pressure?”) a much more accommodative posture had the “presumed candidate” had indeed won.
However, as hard as it seemed to try to rationalize what the Fed. had/has been signaling. And what was now being professed at this latest presser. Nothing drew more attention (again in my opinion) than the Chair’s reaction to the questioning as to reconcile what everyone in that room, along with the entire marketplace, thought was incontrovertible. e.g., The Fed’s desperate calls (or pleas) for fiscal help from the Congress.
This began in earnest with her predecessor Ben Bernanke, and has been carried forward and voiced numerous times during her own tenure.
So prominent has this call been, it spurs immediate remembrance of what is now known as the “Get back to work” exchange between Sen. Schumer and then Chair Mr. Bernanke. It’s now become its own running joke whenever any Fed. member has openly called for fiscal help rather, than let monetary do it all.
Yet, Ms. Yellen seemed to become more than annoyed at the inference that the Fed. was somehow needing anything. As a matter of fact she seemed to make the point quite forcefully that unemployment at that time was quite higher, hence leaving the unsaid, said, as “this time it’s different.” Right, got it.
Yes it is different, but not because we’re going in the right direction. As the Chair did state – the headline Unemployment number is way down since then. That is a fact. However: The other side of that data point which makes it so is another fact everyone conveniently never addresses. What’s that you ask? Fair question, so let’s ponder it shall we?
It took an increase of nearly 10 million more people to be unemployed, and remain that way, from 2012 (about 86 Million) to today, where at the end of 2016, it’s now around 95 Million. I’m sorry, but that’s not “acceptable” or “adequate” in any sound book of business I’ve ever seen or read. And I’ve read quite a few. Then again, I never attended an Ivy Leagued institution. To which I now declare as a badge of honor.
So it came to much surprise when Ms. Yellen was asked about why the sudden change from asking for “fiscal” support to the implying stance they no longer needed any, Ms. Yellen seemed to channel a scene right out of “Blazing Saddles” (1974 Warner Bros.) for her response i.e., “Fiscal? We don’t need no stinkin’ fiscal help!”
And it was in that moment I believe the entire monetary/market landscape not only didn’t laugh – but rather – gasped.
If there was any reason why many (myself being one) could feel those collective gasps right through our screens while simultaneously gasping ourselves? It was in response to her follow-up as to “clarify.”
It was here when the Chair expressed, or seemed to imply, the Fed. would raise rates at an even faster and increasing pace should any supporting data from any future “fiscal” legislation be forth coming.
One couldn’t help but to get the feeling that the Fed. has suddenly 180’d and now will use any supporting metric possible to raise. That’s a far cry from the tentative, everything’s “transitory” so they must wait, and wait, and wait, for just the right data point. So much of a change is this – many are touting across the financial media landscape that the “The Fed. now knows it’s behind the curve.”
It may or may not be that. But there sure is something that has changed the Fed’s posture. Could that “change” be the election results?
Just thinking out loud here, but I couldn’t shake what I believed I was watching.
It seemed to be more than evidently clear (as I interpreted watching this presser) the Fed. is now hell-bent on being “The One’s” responsible for anything when it comes to U.S. economic policy or health. And if they decide (as displayed via the presser) that the current employment situation is “adequate” (i.e., It’s all about the headline number, pay no attention to those 95 million others) or other metrics – their now first propensity of action is to further remove – rather than hold or add further monetary accommodations.
That’s a stunningly far cry from the Chair’s implied view of the economy a mere 30 days prior to the election. And “stunningly” maybe an understatement.
I implore you not to solely take my word, but to watch the presser for yourself and draw your own conclusions. I believe it’s one of the most forceful expressions made, or conveyed by The Federal Reserve that it may in fact act aggressively via monetary policy should it decide – It (“It” being the Fed.) seems fit. i.e., The implications seemingly being sent are that they’ll decide what a “good” economy is – fiscal implications be damned.
Just to be clear: I have argued “normalization” at-the-least should have begun in earnest circa 2013 once the major indexes had fully recovered all losses. After that I saw no defendable excuse. I have strongly opposed the Fed’s supplanting of capital formation and its business fundamentals with its own version of “whatever it takes” whether it was the continuation of QE, ZIRP, TWIST, XYZ, LMNOP, or anything else. All that was, and has been (in my opinion) was nothing more than continuing interventionism for interventionism’s sake. i.e., The central banks were becoming far too comfortable (and enamored) with all this new-found “power.”
And power it has surely found, as well as been recognized for. For it wasn’t all that long ago (a mere 9 years) one had to be either involved or employed on Wall St., or a policy wonk to recall who was the current Chair of the Federal Reserve. Let alone knowing more than one other of the Board. Yet today? Well, I’ll let the latest Forbes™ “World’s 10 Most Powerful CEO’s” list do all the speaking.
I’ll finish here with what I argued a year ago. From: “December 16th: A Date Which Will Live On In Monetary Infamy” To wit:
“Again, I must reiterate: Is it possible that the raising of rates in this climate alone, even if it were the “right thing to do” for the U.S. (i.e., The Fed. raises regardless of turbulence or data points) might be viewed by others (both sabre rattling as well as military engaged countries) as I argued earlier as proof of the Fed. being “weaponized”
Whether it’s true or not will be a moot point. It’s how things are viewed in the eyes of others. Or, more importantly: how things may be spun to their own populace. That’s a very important point to ponder.
I’ll argue those looking for a “boogeyman” will be served a near perfect straw-man setup on a silver platter. After all the reasoning will fall around something resembling: “Why do it other than to bring on such things?” It will be made to order.”
“If China’s market is indeed once again flailing as it did previous; having The Fed. raise rates regardless may be seen in my view as an act of monetary aggression. I wrote about this very subject a few weeks back and was jeered by many in the economic circles. Yet, as we stand today – it’s anything but a laughing matter. And as the title implied, it is a “Perilous Possibility” which needs to be contemplated.
The Dollar is about to do the exact opposite of nearly all other global currencies. This alone begins compiling complicating arguments of nearly every stated Fed. intention. Within the for-ex markets alone it will further crush carry trades. And, in many ways, put already desperate commodity dependent economies (such as Russia and others) into an immediate for-ex fueled world of pain.”
Just as a reminder – The Fed. had to verbally rescue the “markets” by jawboning soothing tones for further, or increased accommodation not once, but twice to quell a precipitous falling market, and remained that way year out, culminating as proof of that posture, with the Chair’s latest speech openly suggesting “high-pressure” may be needed a mere 60 or so days ago.
And now suddenly it’s “Hawks R U.S.?”
So far in regards to China? As I’ve been warning, and warning the Yuan has in-fact reacted. And it’s not good.
The Yuan’s midpoint was set on Friday by the politburo (and that’s a key point e.g., set) at 6.95/USD Which just so happens to be the lowest (or highest depending on you indicator) since 2008.
Now the question that must be answered: Was this in response as to allow further devaluation? Or, was this they best they could do? Either answer is not going to be a good one. Add too this? Suddenly, China is having trouble in their own bond markets causing halts. Yet, one would be hard pressed to know it. Or, to channel my inner main-stream business/financial media – “Nothing to see here, please move along, and we’ll be right back after the next E.D. ad.”
And as for who I’m more than positive we’ll hear from next on this whole topic should the “markets” begin convulsing?
Why do you think I used “hashtag” in the title?
© 2016 Mark St.Cyr