Chad Shoop: The Quantitative Easing (QE) reign has come to an end, as widely anticipated. But there is a problem … where are we supposed to go from here?
The Fed has been lacking in transparency in regards to its monetary policy. There have been hints of a coming interest-rate hike. But when? And by how much?
While the Fed stated for the first time that it could lift interest rates sooner than the market anticipates if the economy grows faster than the bank expects, it was still quick to hedge that slower growth could push back the timing of the first interest-rate hike.
Thanks, Yellen & Co. That’s about as clear as mud. There is only one thing we know for fact to expect from the Fed: Uncertainty. And if there is one thing the market doesn’t like, it’s uncertainty.
We have a dilemma between Fed uncertainty and the market’s reaction. But the solution is simple: stay one step ahead…
No Clear Consensus
Just in the last month we have received dividing commentary from several Federal Reserve Bank presidents.
The Philadelphia Fed bank president Charles Plosser believes interest rates should rise much sooner than mid-2015.
Dallas Fed bank president Richard Fisher said that even if the markets are in a correction, the underlying economy is doing well enough that his outlook hasn’t changed for ending the easy money policies all together.
And James Bullard, the president of the St. Louis Fed, said he could see the Fed delaying the end of Quantitative Easing until December due to lower inflation. He isn’t a voting member, but it still demonstrates the dividing concerns amongst Fed members.
The commonality here is uncertainty. The Fed itself is unclear about the direction for monetary policy — and for that, we have Janet Yellen to thank.
Uncertainty is the New Normal
Ben Bernanke, the previous Fed chair, had clear targets you could gauge — 6% unemployment and 2% inflation. Until we reached, or came close to, those guidelines we knew the Fed wasn’t going to tighten its monetary policy. That’s because the Fed has a dual mandate to promote employment and tame inflation, so those two targets fit right into their realm.
The other tall tasks of the world — economy, markets, debt, etc. — rely on our politics, which isn’t saying much.
That puts Janet Yellen in a tough spot.
While she can’t publicly mention this, she knows rates can’t rise by any meaningful amount because it would cripple our government and slow the economy — two things that aren’t in their mandate, but clearly aren’t good for the market.
That’s the bulk of the reason why Ms. Yellen moved away from benchmarks and onto broader conditions, such as focusing on labor slack instead of a hard unemployment number. Our unemployment rate has dipped to 5.9%, well below the 6.5% target that the Fed had at the beginning of the year, but the Fed has been slow to move.
And what’s to stop Janet Yellen from moving the targets even more? She has already said that the Fed is comfortable with inflation hovering temporarily above the 2% target.
The bottom line is that investors, and even the Fed members, have no common ground when it comes to Fed policy decisions. The only thing we know is that the new target remains uncertain.
As we get closer to an inevitable rate rise, and then to dealing with the bloated balance sheet, we’re going to see a significant amount of uncertainty that will keep the market volatile.