Janet Yellen – is there anything she can’t do?
In a speech to the Economic Club of New York the most powerful person in the world, elections be damned, called back the need for continuing “ramp up” in the Fed Funds Rate. The stock market rallied as the happy days of last year returned and everyone had reason to believe that free money was on the horizon.
Funny, they don’t cheer like that for Bernie Sanders.
What is going on? Are we not going to raise rates this year after all? Has Yellen started channeling her inner Greenspan by saying as little as possible in the maximum number of words?
No, this is what we have to expect. It’s really all about China, which is to say all about currency conversion, and the much-hyped “dual mandate” of the Fed that’s really a much more complex triple mandate or more. And we all, sadly, have to stay tuned to find out what it really means.
The speech wasn’t projected to be a real market mover, but it turned out to be. The Fed Chair laid out the case for weaker than expected growth in the near future – not here, but around the rest of the world. Why exactly we need to care about this is another problem altogether. The words that caused stocks to rally weren’t directed at them, but they might as well have been.
“…. global developments have also weighed on business investment by limiting firms’ expected sales, thereby reducing their demand for capital goods; partly as a result, recent indicators of capital spending and business sentiment have been lackluster. In addition, business investment has been held down by the collapse in oil prices since late 2014, which is driving an ongoing steep decline in drilling activity.”
While it may seem obvious that low oil prices are good for everyone, the lack of explosive growth around the world is starting to make everyone edgy. The lack of confidence created in this environment puts a cap on growth, the reasoning goes.
You can see the effect in the recent downturn in Gross Private Investment as a share of GDP, a measure first suggested by longtime Barataria contributing commenter (nemesis?) Harry. The measure shows what a good predictor it has been for recessions, but this chart from 2000 shows how weak it has been since the last official recession ended in 2009:
While business sentiment and investment in the US is indeed a bit more lackluster than it should be at this stage, the real problem lies in China:
“There is a consensus that China’s economy will slow in the coming years as it transitions away from investment toward consumption and from exports toward domestic sources of growth. There is much uncertainty, however, about how smoothly this transition will proceed and about the policy framework in place to manage any financial disruptions that might accompany it. These uncertainties were heightened by market confusion earlier this year over China’s exchange rate policy.”
This is where the dual mandate of the Fed, balancing inflation against unemployment, really hits the road – or perhaps the high seas. We have no reason to care about China except for the way in which their problems strengthen the value of the US Dollar. That trend, burning strong for two years now, has the potential to accelerate and make US made products even more expensive. That would hurt employment and eventually come to our shores.
In other words, the dual mandate means the Fed has to keep an eye on currency translation as much as anything, giving rise to a mandate to balance a lot more than just two forces in opposition to each other.
The market rally seems a bit strange in these terms, if you think about it. A capital flight to the US would indeed raise the value of the Dollar and increase manufacturing costs – but it would also almost certainly mean a big increase in the money coming in to US stocks.
Could it be that the market itself has found faith in a platform more progressive and is now championing the need for more US manufacturing jobs? It seems more likely that, like far too many of us, the allure of cheap money is what really counts.
But for now the Progressive angle and the stock market’s angle have converged. We have Janet Yellen, the most powerful woman in the world to thank for this. And no matter what happens in November, she’ll still be the most powerful woman in the world.
Whether that’s a good thing or a bad thing is up to you.