What if they had a Fed meeting and nobody cared?
Janet Yellen at her press conference. Source: Federal Reserve
The FOMC had been trying to talk up rates for the past two months. Some notable policy doves were commenting that the market had it wrong—that interest rate expectations were too low, and that we should expect two or three rate hikes this year. Even Chair Yellen got in on the act. In May, she noted that long as the economy continues on-track, the Fed would continue to normalize rates.
That was then, this is now. The employment report threw a big bucket of cold water on those plans. The latest report was “disappointing,” Yellen noted. There has been a loss of economic momentum. While we shouldn’t pay too much attention to one data point, they can’t ignore broad economic indicators that are cautionary. Yellen claims that the Fed is data-dependent. So when dovish data come in, they have to re-think their position.
So who’s in charge? During a two-minute period in her press conference, she used the word “uncertain” or “uncertainty” at least five times. The Fed and the market are on the dance floor, but neither knows whether to put their hand on their partner’s shoulder or around their waist. No one knows who’s leading.
Illustration: Henriq Bastos. Source: Morguefile
All the Fed officials have been talking about normalizing rates. But their talk is aspirational: it’s more about the Fed’s hopes, and less about their plans. They aren’t leading, but they do have a $5 trillion balance sheet and an unlimited checkbook. That’s more than anyone else. We don’t want to get on the wrong side of that.
As long as we’re stuck in a slow-growth economy with no growth in manufacturing, mining, and energy jobs, we’ll feel unsettled. Janet Yellen claimed yesterday that every meeting is live, that rate changes are always possible. But given the lack of leadership, it seems that the Fed is increasingly irrelevant.
Douglas R. Tengdin, CFA
Chief Investment Officer