Fed Faltering: Reality takes bite out of over-Fed recovery
David Haggith
TheGreatRecession.info
April 5, 2016
Stocks are feeling the love. While the momentum of the stock rally stumbled in the last two weeks of March, the Dow did manage to break ever so slightly above the downward trend line of the high points it established over the past twelve months. (Not enough in my opinion to be conclusive for those claiming the bear market has ended, given trend lines are not absolute enough for such a fractional tick above to prove anything … yet.)
The cause celebre that nudged the market above its past trend was Janet Yellen’s, market-embracing statement that the Fed is going to back off on the frequency of its planned interest-rate increases.
While the market rejoiced that the nation’s foundational interest rate will tickle the zero bound a little longer, Chairwoman Yellen’s words show that the Fed’s confidence in its recovery is waning. The Fed is already backpedaling from the schedule of rate increases it telegraphed back in December for March.
“Most committee participants now expect that achieving economic outcomes similar to those anticipated in December will likely require somewhat lower interest rates,” Fed Chair Janet Yellen told reporters Wednesday after the two-day meeting of Fed governors…. (International Business Times)
One would do well to read that as more than a speed-zone sign on interest rates. It’s more of a “falling rocks ahead” sign. There is, in other words, more possibility in Yellen’s carefully selected words than just a delay in rate increases. She states that moving forward may require “lower interest rates.” She may have just meant “lower interest rates in the future than the amount to which we had planned to raise them,” but her words certainly allow for the possibility that the Fed may actually lower below today’s benchmark, which would be to return to the zero bound, which would mean utter collapse of their recovery in just three month’s time.
Regardless of what she meant, her wording was more dovish than many dared hope for, so it caused a spurt of glee. The Fed knows that investors milk every word for hints of the future, and so it always speaks in minimalist tones, indicating its plans with the smallest of hints. Yet, Yellen chose language that allows for the possibility that the Fed could actually reduce interest rates.
She made this surprisingly dovish statement, knowing full well that any announcement of delays in interest-rate increases strains Fed credibility by contrast to its bold (now seemingly brazen) victory statement about a vibrant, recovering economy only three months ago when the Federal Reserve made its first rate lift-off and laid out its plan for future raises. (Back when they cracked open the champagne bottles to celebrate the success of their nearly decade-long recovery plan.)
The Rest…HERE
