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Markets to Balk at Fed's 'Return to Normal'

Markets to Balk at Fed's 'Return to Normal'

(Dollar Photo Club)

Wednesday, 24 August 2016 11:39 AM Current | Bio | Archive

Markets seem definitively being in some kind of a “snoozefest” that probably should continue until Fed Chair Janet Yellen speaks at the Kansas City Fed Economic Policy Symposium “Designing Resilient Monetary Policy Frameworks for the Future” in Jackson Hole, Wyoming.

The big question about this event if this time around will turn out of being one of these pivotal moments as in fact has been Ben Bernanke’s 2010 Jackson Hole speech (“The Economic Outlook and Monetary Policy”) that put QE II (second quantitative easing program) on its path forwards and that could be described in 3 words: “lower for longer.”

It was in 1999 that Alan Greenspan also made his historical and pivotal remarks (“New Challenges for Monetary Policy”) at the Jackson Hole yearly symposium which we could describe as the moment when the so-called “Greenspan put” was born and which is to some extend still alive.

History will tell if these undertakings have been in the end the right decisions, but for which it's still too early to know.

Interestingly, Greenspan’s undertaking got its first high-level remarks by the Bank of England’s, then deputy Governor Sir Marvin King who stated only a couple of months later: "There is now a widespread intellectual consensus – almost a conventional wisdom – about the objectives which central banks should pursue, and the means by which they should pursue them. This is a very dangerous position. Could it be that 1999 is the apogee of the power of central banks? I believe that if central banks are to retain their central position in economic policy making, they must face up to the intellectual and technological challenges that lie ahead. Unless they do so, popularity will turn to disillusion.” 

In the meantime, we have learned that the Big Central Banks like the Fed, the ECB as well as the Bank of Japan, and others, all have lost since then a non-negligible portion of their credibility, over different time-spans of course.

As to whether Yellen's Jackson Hole speech will be one of these rare pivotal events that will set the Fed’s path to “normalization,” we will have to remain patient.

To be sure, it has been remarkable how the markets have practically negated the most recent remarks of, for example, New York Fed President Bill Dudley, who is known for being a close ally of the Fed Chair, saying: “As the U.S. labor market tightens and as evidence builds of wage gains, we’re edging closer towards the point in time where it will be appropriate I think to raise interest rates further. It’s possible to hike rates at the next scheduled policy meeting on Sept. 20-21. We'll have to see where the data falls. The U.S. central bank also needs to watch the broad supports for the economy and how inflation plays out in the coming months.”

In this context, it could be interesting taking notice that the strongest wage growth is now finally going to the lowest paid workers, which should help inflation move up a little bit. 

Besides that, Dallas Fed President Robert Kaplan (who is considered as a dove and who isn’t a FOMC voter this year, but will be a voter in 2017), just joined the recent “hawkish” Fed speakers by saying in a Nikkei interview that a rate rise is warranted if the jobs trend continues.

Finally, Fed Vice Chair Stanley Fischer, who in the past has argued at several occasions the Fed needed to be wary of being too slow in raising interest rates, just said that the Fed is close to its targets and that the behavior of employment has been remarkably resilient while inflation outside of food and energy prices was within hailing distance of 2 percent.

Putting all this together, I think it’s not unreasonable to start considering measures, especially when re-compositions of portfolios are on the agenda, that we are closing in on the start of the Fed’s path to “normalization,” which, in case this turns out to be the case, the overall abnormally overvalued markets (in most of their segments) are not going to like it.

No doubt about that. So, let’s remain patient and see what happens. 

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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I think it’s not unreasonable to start considering measures, especially when re-compositions of portfolios are on the agenda, that we are closing in on the start of the Fed’s path to “normalization.”
fed, markets, rates, invest
Wednesday, 24 August 2016 11:39 AM
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