Well, she saved the day and she might have secured the plum job of Treasury Secretary if Hillary Clinton wins in November.

Fed Reserve Governor Lael Brainard’s speech yesterday brings to mind (Dana Carvey) doing an impersonation of George H.W.  Bush’s reluctance to make key decisions…

“Not gonna do it…wouldn’t be prudent…”

Her key comment has put the wind into the sails of the market, which had already begun rebounding from Friday’s debacle:

“In this environment, prudent risk management implies there is a benefit to waiting for additional data to provide confidence that domestic activity has rebounded strongly and reassurance that near-term international events will not derail progress toward our goals”

Her speech was an eye-opener for many because she invoked an argument for a new normal, which is often a red flag or gibberish when the experts can no longer understand or can manipulate circumstances.

Key Features of the "New Normal"

Here are the five key features highlighted by Brainard and my interpretation of what she was trying to get across to Wall Street and Main Street.

1. Inflation Has Been Undershooting, and the Phillips Curve Has Flattened

There has been an old formula, known as the Philips Curve that went like this:

• Labor slack diminishes
• Economy moves to near full employment
• Puts upward pressure on inflation

Since 2012, inflation has largely moved sideways as the unemployment rate declined to 4.9% from 8.2%.   That unemployment arrow is also often diagrammed as the booming economy arrow; of course, that’s not the case today, either.

2. Labor Market Slack Has Been Greater than Anticipated

The fact that wages aren’t soaring is another sign. Perhaps the Fed’s modeling and assumption of full employment are way off, although they would only grudgingly admit to being slightly off.  There is no inflation as there isn’t too much money chasing too few goods and services.

3. Foreign Markets Matter, Especially because Financial Transmission is Strong

This is the part about importing disinflation and the pressure that a weak global demand has on U.S. corporate profits.  This is also the part where Wall Street worries about the most with respect to a potential trade war.

4. The Neutral Rate Is Likely to Remain Very Low for Some Time

The rate of inflation will remain low for some time, and there’s nothing the Fed can do about it as the street is dictating rates more so than Fed policies.

Perhaps it’s the most salient for a monetary policy, but it appears increasingly clear that the neutral rate of interest remains considerably and persistently lower than it was before the crisis.

5. Policy Options Are Asymmetric

I think Brainard is saying that while their toolbox is empty, it’s too soon and too risky to take back accommodation prematurely.

Conclusion:

The Fed knows (what we know) that the real unemployment rate is probably 10%+, and that wages aren’t moving fast enough to justify a preemptive strike against inflation. I think they are collectively trying to get the public prepared, and they know it’s going to be a multi-month task.

The Next Rate Hike

Coming into the week, Wall Street wasn’t completely convinced of a rate hike his month; nonetheless, the rates probably were increasing.

Fed Rate Hike Probably	25bps	50bps	75bps
September	21.0%	NA	NA
November	24.6%	1.3%	NA
December	43.5%	10.2%	0.5%
February	43.6%	12.2%	1.1%

 

Yesterday, there was still a sense of cautiousness to the session, which is reflected in the fact that the two strongest sectors are considered conservative safe havens:

• Consumer Staples +1.9%
• Utilities +1.8%

Moreover, market breadth underscores how sharply fortunes shifted Friday as there were only 28 new highs on the NYSE versus 208 a week ago.  NASDAQ, which moved into the green before other indices enjoyed a slightly better breadth with 43 news highs against 178 a week ago.

NYSE	Today	Week ago
New Highs	28	208
New Lows	22	10

 

NASDAQ	Today	Week ago
New Highs	43	178
New Lows	44	22

Market

The market held where it had to; and now, with that being said, the Fed has entered a quiet period. It’s going to be interesting to see if major indices resume their sideways movement or find ways to breakout. For the Dow, that means a close north of 18,640.

Today’s Session

I wrote about the big move that was going to happen after the long lull and we are now in the midst of the typical volatility associated with moves past the apex of pennant formations.  Yesterday’s rebound was easy considering the depth of Friday’s loss, but it will take a session that opens with a triple digit Dow loss and finishes higher to illicit the kind of confidence that could sustain a longer upside move.

On that note, however, is still the conundrum of lack-of-leadership.

Meanwhile, Apple is higher ahead of the new iPhone releases and helped by woes for the latest smart phone from Samsung (never a good thing when airlines ask you to turn off your smart phone because it could overheat).  There was a time a big move in Apple would have coattails for the entire market, but today, only direct suppliers’ shares look higher at the open.

Tweet

 

Home | Products & Services | Education | In The Media | Help | About Us | Disclaimer | Privacy Policy | Terms of Use | All Rights Reserved.