Parsing the words of central bankers once required one to learn the equivalent of a foreign language and was considered an art form. Back in the day, one had to learn how to interpret the words used by Alan Greenspan in order to try and figure out what the Fed might do next. Heck, at one time there was even a Greenspan "briefcase indicator," where the thickness of the Fed Chairman's briefcase he carried to meetings of the FOMC was considered a sign of whether or not the FOMC would take action.
However, Ben Bernanke changed the game after the financial crisis by promoting transparency. Instead of trying to read the Fed's tea leaves, today one only has to listen to the commentary from the various Fed officials, review the statements released from the FOMC meetings, and watch the press conferences.
Janet Yellen has continued this policy of transparency during her tenure as Fed Chair. Over the past few weeks, it has become obvious to Fed watchers that Yellen's bunch was going to hike rates this week. And hike they did, moving the target for Fed Funds up 0.25% to a range of 0.75% to 1.00%.
On the subject of the economy, Yellen summed up the situation in a single sentence by stating, "The simple message is the economy is doing well."
And in terms of what the Fed expects from the economy going forward, Yellen went on to say, "We have confidence in the robustness of the economy and its resilience to shocks."
In reading through the FOMC statement that accompanied the rate announcement yesterday, the key takeaway was (well, for me, anyway) the Fed believes there is now a possibility that the economy will surprise to the upside relative to their forecasts. Credit optimism toward Trump's policies if you'd like, but the bottom line is this is the reason rates were increased in March instead of May.
It's a Target
Turning from the economy to the state of inflation, Yellen calmed the markets yesterday by suggesting that the Fed can allow inflation to run hot for a while. Market players had feared the Fed might start to "worry" about inflation and accelerate their rate hike plans, which, the thinking went, could wind up hurting the economy in the process.
Recall that the Fed's second mandate is to promote "price stability." In English, this means the Fed's job is to keep inflation at a reasonable level. Up until 2008, this meant worrying about too much inflation. But with the threat of deflation becoming real post-crisis, suddenly the "worry" about inflation was too little, not too much.
Yellen reminded everyone yesterday that the Fed remains in an accommodative stance as opposed to an inflation-fighting mode. "There will be some times when it (inflation) is above 2%... It's a reminder that 2% is not a ceiling on inflation. It's a target," Yellen said at her press conference.
One of the primary questions in the markets coming into Wednesday's presser with Yellen was what the Fed was planning to do after yesterday. I.E. Had the combination of better than expected economic data and proposed fiscal policy initiatives changed the Fed's thinking at all?
The good news was that nothing changed yesterday. The Fed is still planning on a total of 3 rate hikes in 2017, another 3 in 2018 - with the ultimate goal being a Fed Funds rate back to "normal" (i.e. 3%) in 2019.
The markets liked what they heard from Ms. Yellen. Stocks rose. Bond yields fell. And the dollar weakened.
All of the above was attributed to the simple fact that Janet Yellen assured markets that (a) the Fed was not going to overdo it and put the economy at risk (b) there was no mention/hint of a fourth rate hike, and (c) the Fed feels the economy can handle the current path of slow and steady rate hikes.
Thought For The Day:
Entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States. -Ronald Reagan
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of the Fed's Next Move
2. The State of Trump Administration Policies
3. The State of the U.S. Economy
4. The State of Global Central Bank Policies (Think ECB pulling back on QE)
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.
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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.
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