Over the past few years no institution has had more consequences beholden to their words than the Federal Reserve. So much so one could reasonably argue in response to prevailing circumstances their communiques overshadowed most others; including presidents and other leaders.
The problem today is; in their effort to bring more clarity via press-ers, and more as to what might be transpiring behind the doors at the Eccles building, they’ve now communicated more confusion in the last two weeks nullifying all previous efforts. As of now they’ve not only hindered, they’ve made their communiques outright suspect for the foreseeable future. Quite literally – at the exact worst of times.
When the Fed. held back and decided to postpone raising rates by a measly 25 basis points it shocked many. The underlying (as well as whispered) issue that still dominates the reasoning is: What does the Fed. know which they aren’t telling?
One could argue this was in direct response to China’s ongoing stock debacle. Yet, the issue here was: and this is the Fed’s concern? For China itself is still standing pat on the premise they were in control and were dealing with its gyrations directly. While concurrently their GDP growth (as implied by the politburo) is still on track to be more than double the GDP of the U.S. Which begged the question: So what’s the big deal with raising rates here since it’s been the most publicized and anticipated by an amount so small (25 basis points) many see it be more of a symbolic gesture rather than anything else, if things are supposedly doing better here?
The Fed’s insertion of the words “international developments” added confusion not clarity. So now, one has to wonder what data point is now relevant for a Fed. decision? i.e., U.S. unemployment data? Or, does Brazil’s free-fall and rising inflation combined with a Petrobas™ calamity now preempt or overrule? Can (or will) other “international developments” now overshadow a U.S. economy concern? The answer to these types of questions are now totally up in the air; for the Fed. made that perfectly clear with its latest decision. Remember; the reason given for inaction over action was “international developments.” Not U.S. developments.
One can’t help but contemplate: Will access to the bond markets or bank loans for say a troubled company in Peoria, Detroit, the Dakotas et al or even a State itself be equal or given more weight if a future decision if buttressed with a concerning factor as say Brazil might be for access to Dollar swaps from the Fed.? If both are being hindered at the same time which one tips the scale? U.S. interest or development? Or, does the “international development” side take the favor? It’s now an open question based purely on the empirical evidence. Not speculation.
Again: Does a company in the U.S. with global reach draw the same, less, or more concern as to access the capital markets than say another nation does that may be in need of access to Dollar swaps or other necessaries provided via the Fed.? What “international development” will now trump a domestic one? Do interest rates (whether higher, lower, or remaining fast) borne to U.S. entities take a back seat to “international developments?” Once again, with the latest “clarity” statements emanating from the Fed. – these are open questions. For they just proved by their own votes “international” concerns trumped domestic. i.e., U.S. savers and more took a back seat to share holders in China.
These questions at first sound vague or even preposterous. However, I must implore it’s by the Fed’s own actions and reasons why per their latest decision – they are anything but “unimaginable.”
Imagine you’re a company trying to deciding on whether you should now make any large capital expenditures based on Fed. policy for interest rates. With what you just witnessed over the last two weeks – do you have more clarity as to “pen a deal?” Absolutely not. If anything, you’re going to sit back and wait, (and quite possibly just buy back more shares) which is exactly the opposite of what the Fed. is trying to push forward. i.e., cap-ex spending. This problem, again, has been exacerbated by their own hands. For they just pushed most considerations not only back into the neutral position, but quite possible park with the emergency brake securely applied.
Many think the decision to not move forward at this last meeting was its own version of a “one and done.” In other words, just an obvious blunder not to move when clearly they should have and will be long forgotten in the coming weeks. However, I believe there was far more to this latest policy error than what was taken at first blush.
What transpired both during as well as right after Ms. Yellen’s FOMC presser was anything but a clarification of where the Fed. as a whole thinks, or believes is happening not only in the U.S. – but globally. And it was in this clarity for the observer, not the Fed., where the realization of troubling issues were on display for anyone caring to look with a concerning eye; rather than the usual sycophantic ear displayed by most of the financial media.
Here are a few things where I was left dumbfounded as to not be pursued or pressed with vigor by any of the financial media during that conference. For the implications are far from minuscule:
Why did “international” eclipse domestic concerns? If China is stating publicly they have things under control, why is the Fed. basing its decision to avoid “normalization” for domestic monetary policy? And if “international” was not a code word for China, then what other global development was the decision based on?
How is it during the weeks and months of this most telegraphed “intent” to raise where Fed. officials have been more vocal about the need, as well as the ability, to move off of the zero bound since the economy has improved via the Fed’s own talking points. Yet – did not? Were officials just talking up the economy? Or, are we in worse straights than we’re being told from official channels?
Is the Fed. underestimating the potential backlash for second guessing future decisions as this one inherently clouds certainty rather than clarifies? The exact opposite of what the Fed. has tried to dispel.
Last but not least: How is it for the first time in Fed. history a member openly stated (via the Dot Plot) the forethought or desire that Fed. interest rate policy would not only remain low but in fact cross the Rubicon into a negative rate policy when clearly the Fed. itself is signaling an improving economy? The two not only don’t fit, but the timing of such a declaration is counter-intuitive.
And that last one is the very question that has changed everything in ways I truly believe the Fed. itself (and most of the financial media) doesn’t understand. Which in and of itself – is another very troubling matter from my viewpoint.
During her presser Ms. Yellen gave what many take as the typical “Fed. speak” responses to questions such as (I’m paraphrasing) “Not something we seriously considered.” Or: “We would look at all available tools and evaluate it under ….” And so forth. However, the issue here is while everybody wants to think of it as a parting members final statement. No one can be sure if it wasn’t Ms. Yellen herself. Because, after all – they are made and publicized in anonymity. It could be any member.
Speculation has now become a clarifying qualifier. And that’s a very new, very troublesome epiphany I would imagine the Fed. has yet to fully comprehend.
Thought exercises such as the following are not relegated to the conspiratorial. With what has taken place over the past few weeks, if you’re not asking questions and trying to come up with answers that seem absurd today – you aren’t thinking hard enough. Especially if you’re in business that demands understanding of how your interests coincide and are either influenced, or altered, alongside Fed. policies and decisions. To wit:
Maybe it wasn’t some “parting shot” (e.g., a dot in the negative field on the Fed’s Dot Plot) as others have reported. Maybe it was intentional as to get this subject on the table for current Fed. members. In other words not out of spite, but rather, as a farewell (agreed upon) parting gift.
Let’s not forget. An institution like the Fed. is just that – an institution. And a powerful one at that. If it was done as some form of “parting shot” the implications of just how bitter and divided the Fed. has possibly become are staggering. For such an action as this one risks being seen as a pariah, and quite possible shunned in retaliation from anything “banker” related for the rest of one’s life. And if one has spent their life as a “banker of bankers” doing so would have even more onerous implications. Don’t let the implications inherent on so many levels be lost on you. Truly ponder this, for those implications are extraordinary.
Let me illustrate with this. Imagine how much of an “off-the-reservation” or “political-nightmare” the following hypothetical would be:
Imagine if there were the equivalent publicized communique emanating from the Joint Chiefs of Staff which included the President along with the House and Senate leaders, where they publicly stated anonymously their forecast for a nuclear strike via a “dot plan.”
It would be one thing for some of those “dots” to appear near a so-called “inevitable” line from time to time. However, if it were during a time of heightened tensions and sabre rattling from not just one, but rather a consortium of rival nations. If one of those “dots” appeared for the first time in history to be in the “need to launch today” area. It changes everything, and I do mean – everything. For nations would have to speculate – It very well could have been the President! And not doing so would be a dereliction of one’s duty or office where lives, and national sovereignty are at risk. What it would also do is saddle every foreseeable press conference with an almost unavoidable stampede of demands at the exclusion of nearly all else for “clarification” on this one sole premise.
This is what happened in-kind with the Federal Reserve’s latest publishing of their own Dot Plot. One of the members placed their “dot” in the monetary equivalent of the “nuclear option” showing their forecast or propensity that the Fed should not only not be raising rates, but rather, should relinquish ZIRP for NIRP. e.g. from zero to negative. This changes everything in ways I’m not sure even the Fed. itself has estimated.
As I stated earlier, one could use all the conjecture one wants as to speculate with near certainty it was this member or that member, or never this one, or that. However, it’s all just that: conjecture. Because anonymity allows for exactly the opposite arguments of; it very well could be Ms. Yellen herself. No one knows. But the trouble is, it is now the most important speculative thought exercise everyone must now carry around and contemplate along with everything else. For that Genie is now out of the bottle.
Adding to all this which quite possibly made matters even worse was Fed. Chair Yellen’s latest speech in Amherst Massachusetts where towards the end she experienced obvious health complications. The speculation is now swirling as to what type of “event” did she experience. i.e., Dehydration? Or something worse? Although it’s all speculation from afar the one thing I heard from people I asked who are in the medical field that was unanimous: The impetus was more than likely stress related.
Personally that diagnosis makes absolute sense in my view. However, one thing still scratches at the back of my mind. At first they said “dehydration.” Fair enough it’s a reasonable conclusion. Yet, being from Boston I’m personally well aware some of the finest facilities in the world capable of diagnosing her are available. If the Fed. wanted to dispel any rumors or at the least quell many concerns all a press agent needed to do was to say something like the following:
“It appears like a dehydration issue and the EMT’s (I’m assuming they were called) concur with this. However, Ms. Yellen is going to be have a quick exam and possibly an MRI as to make sure it was nothing else before she returns. (for a person of Ms. Yellen’s stature the pathways would have been cleared with immediacy) After all, we’re very fortunate such an event happened within such a renowned medical area.”
Simple, easy, and squashes a boatload of speculation. Also, is that not just plain commonsense? Why would you not? Or, they did and they won’t say. For as of this writing Fed. official channels are remaining tight-lipped on any further details.
And as such, as I related to earlier once again there are far more questions interjected via the Fed’s own hand that have global implications for uncertainty and resolutions rather, than give any clarity for the foreseeable future such as…
Did a parting member decide to stick it to the current Fed. and open up a can of worms? A can the Fed. may not be able to settle out in the near future? And if so – what does that say for the unity or condescension of current members?
Was the “nuclear option” seen within the current Dot Plot a choreographed move done as to give cover to current members or Chair as to get the issue on the table in some form of “test balloon” scenario wrapped in plausible deniability with a very Keynesian thinkers parting?
Was this action of no action so contentious between members that the decision was more of an arm twisting consensus rather than a consensus of agreeing minds? And if so, why so?
Did the Chair have a near revolt on its hands with standing pat? For many of the once dovish viewed members were speaking publicly very hawk-ishly including the Chair herself.
Who or what changed as to allow not only what many saw as a complete reversal of previously choreographed and publicized intent – but have a publicly stated Fed. communique showing a never before in history vote (via the Dot Plot) for negative, repeat; neg-a-tive interest rate policy? All while members continue to publicly state the U.S. economy has and still is recovering.
Scenarios such as these one can easily presume would bring on quite the stressful situation for any Chair.
To reiterate; one can easily see there are far more questions today than answers. All from an institution that has set as its communication policy – more is better – as to clarify and help remove uncertainty from both the markets as well a what their intents going forward will be.
In my eyes it seems to be working exactly the same as its other policy outcomes: adding confusion, uncertainty, and having the exact opposite of intended results.
© 2015 Mark St.Cyr