WASHINGTON, July 12, 2017 – For the past few weeks, writing this column has been making us feel like Johnny One-Note.
We’ve complained about boredom, bad news, and the whole “Sell in May” thing, basing this summer’s market malaise on a variety of things ranging from Washington’s inability to deliver on Election 2016 promises to the essential dishonesty of the political and financial media to the Federal Reserve’s seemingly implacable desire to jack up interest rates without any evidence whatsoever of inflation on the horizon.
But what a difference a day makes. In remarks made this morning, Fed Chair Janet Yellen jolted Wall Street’s dormant bulls into frantic action by hinting the Fed may have changed its collective mind on those relentless interest rate hikes they’ve been promising (and delivering) since, oh, yesterday.
The result? As of approximately 10:30 a.m. ET, the Dow, the S&P 500 and the tech-heavy NASDAQ are all up by approximately 0.75 percent in just the first hour of trading, with the widely-followed Dow up some 150 points to stand at approximately 21,560, give or take a point.
“Fed Chair Janet Yellen surprised markets again, when after weeks of a hawkish setup, she suggested that the Fed is not only uncertain ‘about when – and how much – inflation will respond to tightening resource utilization,’ but warning that the federal funds rate may ‘not have to rise all that much further to get to a neutral policy stance.’
“Even Goldman was surprised by the unexpected dovish relent….
“And now it is her turn to explain why, as Richard Breslow lamented earlier, Fed watchers will soon need VR goggles to understand the relentlessly growing confusion in Fed announcements and forecasts.”
At least the bulls don’t seem to be confused.
CNBC echoes Zero’s observations:
“‘After months of talking tough on rates it appears that Janet Yellen has changed her tune. My belief is that the original hawkishness was contingent on a belief that pro growth policy changes were right around the corner,’ Jim Iurio, managing director of TJM Institutional Services, said in an email.
“‘However, this takes away one of stock markets primary worries, that the Fed would raise rates before the political landscape could be sorted out. In other words, this is a long way of saying the Fed’s got your back,’ he said.”
As for us, we’re delighted that some of the negative smoke has cleared from the Wall Street battlefield this morning.
However, to temper our enthusiasm a bit, Yellen also noted that the Fed still had every intention of lightening up its balance sheet sometime later this year. This continuing process, once commenced, will likely last for years, as the Fed begins to sell off its vast hoard of bonds, notes, whatever that it began acquiring in the early years of the Great Recession to support the nation’s business and government capital requirements. This process in and of itself will have the effect of firming interest rates further, though presumably in minimal increments.
Perhaps the Fed – having finally seen a lack of inflation on the horizon even as commodity prices began to deflate once again – finally realized it will take a lot more new home construction, job additions and significant salary increases to wake up the actual inflation rate, which has yet to meet or beat the central bank’s target 2 percent rate on a sustained basis.
The nation’s central bankers may also be wary as well of committing the same mistake the Fed made in 1937 when it goosed interest rates a bit too enthusiastically, causing a very delicate U.S. economic recovery to drop back into the Great Depression’s familiar black hole of despair. There’s no point in learning that lesson again. We hope.