Bernanke presided over the Great Financial Crisis of 2008. Greenspan had the 1987 crash, along with the 2000 DotCom bust. Volcker had the bond debacle of the early 1980’s and the subsequent Latin American debt crisis. For the past 35 years, every Fed Chairperson has been tested with some sort of financial event. Until now…
Janet Yellen was sworn into office as the Chair of the Federal Reserve on February 3rd, 2014 and since then, it has been fairly smooth sailing for financial markets. Sure there have been bumps along the way, but in the grand scheme of history, they have been fairly benign.
Yellen’s term ends in late January 2018, and although no one has confirmed it, let’s face it – she isn’t staying on. She will be 71 at that time, and although Greenspan stayed on as Chairman until he was 80, I just don’t see Yellen wanting to spend her golden years running monetary policy for this administration. Not only that, there is no way Trump will leave her in charge. The White House is already preparing markets for a change, floating Gary Cohn’s name as a potential successor.
So Janet has six more months of steering this global supertanker of an economy. Does she rock the boat and attempt to quell her critics that claim she has been too easy for too long? Or does she simply try not to make waves and see if she can keep the balls in the air until her handoff? Or does she cruise into the sunset at 197 miles per hour, letting the markets run hot, not caring about the problems she might leave for her successor?
I had really believed the world’s Central Bankers had agreed to a hawkish shift in the wake of the recent overly easy financial conditions. There were many signals from various Central Bank officials throughout the globe. But yesterday at the Humphrey Hawkins’ testimony, Yellen seemed to completely abandon any notion that Federal Reserve officials were targeting financial conditions. Instead she delivered a boilerplate Central Bank head speech.
Markets took this as a signal that all their concerns about the Federal Reserve taking away the punch bowl prematurely were overblown.
Risk was back on baby! Speculators grabbed both stocks and bonds more quickly than your favourite characters die on Game of Thrones.
But the absurdity of this chase could best be summed up from this great tweet from Gains, Pains & Capital:
Yup, can’t say I disagree. Too much of what passes for analysis these days is merely pundits trying to forecast Central Bankers’ next move. I am by no means immune. I spend far too much time trying to read the tea leaves of each Federal Reserve officials’ speech.
One of my favourite traders, the terrifically nice guy Anthony Crudele (and host of the Futures Radio Show), sent out of this tweet that really struck a chord with me:
This Fed transparency has become more of a liability than an asset. Instead of providing policy clarity, it creates confusion as various factions of the Federal Reserve board debate their positions in a public forum. The end result are these violent whipsaws as markets overinterpret each different Fed officials’ speech as a potential change of policy, whereas the reality is that their views are barely changing from speech to speech.
There is no doubt in my mind that two of the most important FOMC board members, Fischer and Dudley, are concerned about financial conditions becoming too easy, and are proponents of tightening every second meeting until the speculative fervor subsides. I had assumed Yellen was in the same camp, but yesterday’s speech throws that into question.
Yet I can’t help but wonder if Yellen simply doesn’t want to upset the apple cart towards the end of her term. She can see the finish line and I have no doubt she is hoping to make it without a financial crisis. Like a sports team that is up by a goal in the dying minutes of a game, she is simply trying to not make a mistake. So instead of reinforcing Dudley and Fischer’s message, she plays it safe.
Does that mean the Fed has changed course? I don’t know, but think the market is once again over extrapolating the most recent Fed officials’ data point. Regardless of the fact that the speech was from the Fed chair, I am going to stop getting jerked around by each speech and try to remind myself of the FOMC board’s longer term objective. The worries about overly easy financial conditions have not suddenly disappeared, and in fact, the violent rally will probably further convince Fed officials that overheating financial markets are a real concern.
Unfortunately, I don’t have any answers, but the one thing I will suggest is to stop assuming each and every Fed speech represents a change in policy. The reality is that they don’t have a clue what they are doing, and are flying by the seat of their pants much more than most realize.
And I will leave you with this one last thought. Often when a team is up by a goal and trying to play out the clock, they inadvertently change the type of game they have been playing that got them there in the first place. By doing so, they cause the very outcome they hoped to avoid.