I WAS STAGGERED by the performance of recently installed Federal Reserve Chair Janet Yellen at a post-FOMC press conference last week. In response to a question from a Reuters journalist about the likely time gap between the end of Fed tapering and the hike of short-term US dollar interest rates, Yellen answered: “six months”.
Alright, she said it in a roundabout fashion, but that was the main content of the assertion. Markets went a bit pear-shaped shortly afterwards, with stocks dropping and US Treasury bond yields rising in response.
This was either the most terrifyingly naive, newbie response blurted out to a wily question, or a cleverly arch “slip of the tongue”. I suspect it was the former, and for that reason I believe there are reasons to worry about the future direction of markets given the raft of negative global outliers that are floating around. The Fed’s credibility was dented by what I and many others saw as Yellen’s amateurish performance.
Yellen is a believer in transparency at the Fed. Hence her cheerleaders surmise she intentionally put a timeline on possible Fed tightening with that unusually precise answer to a question around which her predecessors in the Fed chair would have danced with obfuscatory glee.
FORMER FED CHAIR Alan Greenspan wouldn’t have given you that number, nor recently retired chairman Ben Bernanke, since they know that dodging size and timing is what the Fed chairman’s job is all about – at least until the central bank’s policy has been decided.
But to me the seemingly revolutionary epithet of transparency, designed to create certainty and all the good that apparently can go with it in financial markets, is functionally redundant.
I base that opinion on the misadventures we have had with “forward guidance” at the Bank of England and, indeed, at the Fed. The previous key statistic of America’s unemployment rate and a target of 6.5% has been, according to Yellen’s testimony last week, dropped as a motor for interest rate tightening.
It’s been pushed aside, in such summary fashion as to make a laughing stock of America’s central bank, in favour of a broader range of aggregate US economic data, according to Ms Yellen. Forward guidance – the “clever” conceit dreamt up by top economic officials, politicians and their groupies – is a colossal embarrassment, and the architects of this cockeyed scheme should go off and chew copies of the Wealth of Nations in due contrition for wasting our time.
If investors suddenly decide that events in Ukraine, China’s faltering growth, failing credit markets, and the the queasy aura surrounding emerging markets are reason enough to dump stocks and bonds, I suspect that the underlying culprit will be Ms Yellen and her less-than-auspicious debut public policy address as head of the Federal Reserve.
Many incoming Fed heads have endured baptism by fire, most notoriously Alan Greenspan, who faced the stock market crash of 1987 a few months after assuming office. With the keystone of global financial market stability – the Fed’s reputation – at stake, Greenspan responded in admirable fashion, principally by slashing short-term US dollar interest rates.
So here’s a note to Janet Yellen: Keep it business as usual
IRONICALLY, THE BIGGEST problem for Janet Yellen is that she will become the unwitting poster child for the normalisation of the US economy. In doing so she will also become the harbinger of doom for the fixed-income asset class as interest rate rises get discounted across the US rates curve. And not only that: in Asia it is widely assumed that higher interest rates will wreak havoc on overstretched household and corporate balance sheets.
If the 30-year bull market in US interest rates is about to reverse course, then it will carry with it an irresistible momentum and one that should be welcomed as it flushes out complacent money managers who have not faced the challenge of asset allocation in a rising rate environment.
But a panicked introduction of that new reality is the last thing the markets need right now. The perceived stability of the Fed is the key anchor that staves off market routs in the face of negative inputs from far beyond American shores. To describe China’s economy as a negative input is surely to understate the reality in what could yet prove to be the unwelcome coup de grace for the global financial markets.
So here’s a note to Janet Yellen: Keep it business as usual. Don’t mention totals or dates outside the auspices of the FOMC. Don’t discuss the price levels in financial markets (your opinion late last year that US stocks weren’t in a bubble was a mistake and not within your remit).
In fact, say as little as possible, or do so in the language of your predecessors, preferably along the lines of Doctor Greenspan i.e. in words that most people have problems understanding. Forget transparency, ditch forward guidance and avoid at all costs an idea revolution at the Fed. If you do all that you might forestall the panic that most people suspect is waiting around the corner. Good luck.