After giving on Tuesday her Semiannual Monetary Policy Report to the Congress, the interesting question is whether Fed Chair Janet Yellen’s glaring inconsistencies in her testimony
do really reflect her own views or the views of the FOMC as a whole.
I put this question because the Fed Chair is supposed to represent the collective wisdom of the FOMC.
Now, yesterday’s testimony was a little bit light on wisdom.
The labor market was described as slowing and given there was no evidence of a slowdown prior the latest release, that assertion would seem to place undue emphasis on the single data point
Related to this, the Fed Chair said: “Other labor market indicators are consistent with a job market that has continued to strengthen. In particular, initial claims for unemployment insurance, now available through early June, remain very low—and therefore at odds with the weaker tenor of the recent payroll figures. In addition, according to the Job Openings and Labor Turnover Survey, the rate of job openings as a share of private employment remains at a very high level; the quits rate has continued to trend up and is now fairly high, the latter measure indicating that workers feel increasingly confident about their employment opportunities.”
About the core personal consumption expenditures (PCE) she said: “The PCE price index excluding food and energy items, which provide a better indication than the headline figure of where overall inflation will be in the future, also remained modest … this index, which rose 1.5 percent over the 12 months ending in April.”
In fact, it averaged 1.7 percent in the first quarter and averaged 1.7 percent over the past 20 years.
So, why is this as a whole considered as a justification for interest rates being around 0.9 percent below their 20-year average? To me this is something of a mystery.
In fact, the only thing we got was a smorgasbord of reasons for activity prompted by inactivity from the Fed.
Nevertheless, and yes, certainly valid to some degree, political risks in the world economy and the conundrum of what is going on with productivity a
re real and acceptable reasons for caution.
However, the labor market
are just not reasons for inaction at the moment.
Indeed, if anything, the Fed’s inaction clearly signals and confirms it is behind the curve and is running the risk of a further pickup in inflation.
Hopefully, we’ll get today more clarification from Ms. Yellen in the Questions and Answers (Q&A) session on the second day of her testimony.
For now, I feel obliged to argue that fundamental economics should defeat flip-flop economics and the Fed should raise in September and December of this year. Of course, this is my personal opinion.
Related to the U.K. referendum, it’s worth noting that Marine Le Pen
of the French Front National, which is a socially conservative, nationalist political party in France whose policies include economic protectionism, a zero tolerance approach to law and order issues and opposition to immigration, has now also backed the Brexit vote suggesting that she would seek to withdraw France from the EU if she were to win power in next year’s Presidential election that will be held on April 23 and May 7 next year.
Contagion effects from a U.K. exit from the EU have been an undisputable area of concern in financial markets.
The opinion polls
in the UK are showing the two sides within margins of error of one another
The bookmakers have the remain vote as the most likely outcome.
However, betting odds are essentially a plutocratic statistic, one pound one vote, while the referendum itself is a democratic statistic, one person one vote.
Opinion polls suggest that higher income people are more likely to vote remain. So, a plutocratic statistic may be skewed.
The value of bets favors remain. The volume of bets, the number of bets placed, favors exit.
There is nothing more that one can intelligently say about the vote at this stage.
Besides all that, today, Fed Vice Chair Stanley Fischer will participate in a panel discussion on resolution at the Riksbank Macroprudential Conference in Stockholm. He may be overshadowed by Fed Chair Yellen, but as an alternative respected economic authority at the Federal Reserve, his comments are likely to be worth listening to.
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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