More Questions Than Answers From Fed
Janet Yellen’s job insecurity and ego might drive her to make mistakes as the Fed statement and her press conference may have created more questions than answers yesterday. Without a doubt, the session ended with more doubt than confidence.
At issue is the sense that Janet & Co are itching to pare down the Federal Reserve balance sheet in a ham-fisted manner that could roil the economy and the stock market. It’s important to understand the Fed created $3.5 trillion in accommodation to help the economy. However, that money bought an assortment of assets, including mortgage-backed securities.
The notion was all about the cash sloshing around that would spark a so-called wealth effect. It didn’t work out for Main Street, but don’t despair; if the Fed messes this up, you can participate in shared misery with bankers and rich folks. The Fed will pare down its balance sheet, but they forgot to tell us when it will start.
There are a number of areas where Janet Yellen seems to be disconnected with the real economy. This is one reason why the market’s initial reactions to her question-and-answer session were harsh.
Jobs: The Fed keeps saying the economy is near full employment even as it lowered its own unemployment rate this year to 4.3% from 4.5%, and next year to 4.2% from 4.5%. By using the U6 number - which has come down dramatically - 8.4% currently shows there is significantly more room for job growth as the record was 6.8% back in October 2000.
In addition, the employment-to-population ratio and other components of employment such as chronic long-term unemployment underscore the challenge of retraining workers. This was a question Yellen dodged with respect to cutting job training programs as part of the new budget.
However, she does think a combination of retraining and the Trump apprentice plan, coupled with community colleges and businesses, could pick up the slack to help fill those 6 million open jobs. I’m sure she’s got a point here, but timing is also an issue in addition to the reason why the Fed should stop talking about “full employment.”
Inflation: The Fed actually lowered its core inflation outlook for 2017 to 1.7% from 1.9%; and yet, they seem anxious to unwind its balance sheet. Obviously, the bond market doesn’t see the same inflation threat.
Back in December 2015, Janet Yellen decided to hike rates a mere 25 basis points, and the stock market went into a tailspin. It wasn’t the hike, but the timing and the rationale for the hike. It’s my opinion that she was trying to prove she wasn’t beholden to Wall Street, allowing her ego to come before the work.
Fast forward to yesterday’s press conference: her answer about finishing out her term as Fed chairman showed she was visibly upset and defiant about staying. Rumors continue to swirl that Gary Cohn is the point man as her replacement; betting the odds, it will actually be Gary Cohn.
Once again, the market has to deal with Fed decisions that seem based on ego and proving independence- this time from President Trump. The market is fine with one more rate hike this year, and even three next year; however, the market doesn’t want to see the Fed overreact or lash out for the wrong reason.
As for the initial reaction, it was too many emotions and too many machines doing all the work.
Let’s see how it goes tomorrow once cooler heads prevail. Meanwhile, I love the action in homebuilder stocks, and I hope everyone has exposure to the industry in their portfolio.
As for the broad market, the most important thing is not to panic.
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