What’s The Fuss?
Nothing has changed. The Fed is still on HOLD for a measly quarter point increase in the Fed Funds rate. They continue to poorly communicate their message, thus leaving the door open for speculation about bad things happening here and abroad, problems only visible to them from their high perch, but not to be seen by us mere mortals. They, like the media, give little context to their pronouncements, leaving many unanswered questions, thus continued uncertainty. Exacerbating the problem is the never-ending media campaign to sensationalize and create fear to keep our attention. And, they are having a field day.
“How I Learned to Stop Worrying and Love The Bomb”, I mean the Fed!
This was the sub-title (ex. ‘I mean the Fed’) of Stanley Kubrick’s 1964 dark comedy classic, Dr. Strangelove. The ‘bomb’ referred to was the Hydrogen Bomb … the era, deep-freeze Cold War, just post Cuba Missile Crisis. It was the MAD era (Mutually Assured Destruction). Soviet Premier, Nikita (“We will bury you”) Khrushchev had been to a UN session in the early 60s, where he chided another minister by pounding his shoe on the table (I guess, a show of derision). As such, he appeared a tad bit unstable and he had lots of nukes. But of course, we had lots of nukes. Ergo if either side attacked, it would be the end of the world. So, why worry?
During this time our Strategic Air Command (SAC) always had bombers in the air heading toward Russia. They would always be given a recall code. They would always come back. Kubrick’s gambit was that one bomber, because of a crazy SAC commander on the ground, did not get the recall. I will not spoil the ending. Remember, it is a comedy.
Is Janet Yellen the Crazy SAC commander?
Probably not. But, the way that the media has been treating the potential economic impact of this first rate increase in nine years, you would think it to be a MAD event. It is the same track that they took us on over the end of Quantitative Easing, ‘Armageddon’. Of course, nothing happened.
Although Professor Yellen is in no way the crazed commander, her post-FOMC meeting comments oftentimes poorly communicate what the Fed is really thinking. They lack context and sometimes leave the wrong impression.
For example, the comments on September 16th, left some with the impression that the Fed was really worried about market activity in China and the emerging markets. Did the Fed know something onerous they were not telling us? Though the economic impact of a quarter point change in US rates probably would have no impact on foreign economies; the Fed, because there is no imminent inflation pressure, seems to be willing to err on the side of conservatism to make sure they are not missing anything. But, they really did not say that they had no special knowledge, thus leaving the door open for negative interpretation.
On another point, maybe it would clear the air further for them to zero in on December as the time for the first move, but include softening language by saying they might not go again until June, if employment and inflation data continue supportive.
One thing that seems to be a constant point of negative commentary about Fed policy is the current slow pace of our economic recovery… for which the Fed is wrongly blamed. I might suggest three talking points for the Fed:
- As to wage and wage inflation, globalization has been extraordinarily dampening of wage inflation. There are still hundreds of millions of people around the world willing to work for very low wages to put food on the table. This supply of cheap labor and its downward pressure on wages will probably persist.
- Unlike in past recoveries, fiscal policy has not been a tool to spur growth. Political gridlock totally prohibits that. It is like getting a car started with power only going to one wheel. This wheel that the Fed does not control is not supporting a stronger economic growth trajectory.
- Fiscal Policy in Europe has been very restrictive, ergo no growth there. Monetary policy is just beginning to come around. Meanwhile, China has been on a path to intentionally slow its economic growth.
- Under all of these constraints the United States economy is doing very well.
So WTF, What’s The Fuss? There is no fuss!
My new resolution: I Will Stop Worrying and Love the Fed!
Bottom Line: The Fed is doing the best it can under the circumstances. They just need to communicate better.
All of this spells ‘Low and Slow’ interest rate increases, a very good environment for equities!
What do you think?
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