Interesting, go-figure week. New economic data were strong but ignored by markets; Federal Reserve Chair Janet Yellen made dovish speeches, which revived the stock market; and Ukraine (back from the brink) removed a safety bid from bonds.
March retail sales and a February revision doubled forecasts, both months up 0.7 percent ex-autos. March industrial production likewise rose 0.7 percent. Last week’s drop in new claims for unemployment insurance was not a fluke, near 300,000 again, a 2007 level.
Bond screens did not flicker on that good news, but they did when Yellen spoke. She identified the three unknowns most important to the Fed: the degree of slack in the labor market; inflation so far below target; and externals that might derail recovery, implying concern for fragility.
She emphasized the Fed has been “forced to rely on two less familiar policy tools … forward guidance and large-scale asset purchases.”
Then this splendid clarifier of the March meeting: “The larger the shortfall of employment or inflation from their respective objectives, and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained.”
If the economy poops along as it has been, rates will stay here until doomsday. This Fed is event-dependent, not following a calendar.
Then, Vladimir. He will go as far as sanctions will allow; financial markets will not care much unless those sanctions hurt the world economy; and Vladimir will push limits as long as he lasts. “Kharkiv, Luhansk, Donetsk and Odessa weren’t part of Ukraine until last century. These are the territories that were passed to Ukraine in the 1920s by the Soviet government. God knows why they did that.” Vladimir intends to rectify.
Back to the Fed. Fed-watching used to be simple in theory: It was either too tight or too loose, the degree of stricture measured by the federal funds rate (reserves traded overnight among banks, a fundamental cost of money). Recently things have gotten complicated. Financial workers must be nearly 30 years old to remember the federal funds rate above zero, an interval without precedent in the Fed’s 101 years.
The Fed’s emergency departure from established theory has opened the door to the wrong sort of people, most very well-dressed. It is one thing to question the Fed’s post-Lehman measures, and another to use a confusing situation to grind political axes, and the dull blades of social theory, and to cover for bad performance in investment advice.
Outer-right types object to the Fed itself. They have been apoplectic at the Fed’s interference with their trading, and objected to its efforts to prevent a cleansing financial crash. They have been joined by all sorts of market operatives incensed by the Fed’s outright purchases of assets (“quantitative easing”).
This week Hoisington Management published Lacy Hunt’s latest quarterly. A respected Fedologist since the ’70s, his remarks have been watched carefully since superb observations 2004-2008, detecting the crisis ahead. I assume in frustration, Hunt has gradually descended into the worst of Fed-bashing, his latest claiming there is no economic wealth effect, and QE has been destructive.
A new line of criticism going viral among professionals: The Fed should force Congress and the White House to useful action by refusing to do more itself.
As you make your way through new critiques of the Fed, stick with this timeline:
- The Fed fought the greatest bank run of all time from July 2007 to September 2008 with traditional measures.
- Upon the collapse of Lehman and dominoes beginning with AIG, the Fed guaranteed the entire U.S. financial system and bought assets to thaw frozen markets.
- The effort worked beautifully, the fundamental crisis over by spring 2009, the White House and Congress peripheral at best, as often counterproductive as not.
- Basic financial healing was complete by 2010. The economy has failed to recover since because of external global forces hurting us since 1990 (excessive investment and labor combined with predatory trade to produce global deflation), not the financial crisis.
Fed critics may make any case they wish, but to have validity they must account for that series of events.
Lou Barnes is a mortgage broker based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.
