The Irrelevant Federal Reserve

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.

FOMC Member “Dot Plot” 6-15-16. Source: Federal Reserve

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

By |2017-07-17T12:21:55+00:00June 16th, 2016|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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