Tags: Yellen | bank | economy | Fed

Central Bank Uncertainty Isn't Much Worse Than It's Ever Been

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Friday, 08 April 2016 08:50 AM Current | Bio | Archive

On Thursday, Fed Chair Janet Yellen, speaking alongside her predecessors Ben Bernanke, Paul Volcker and via teleconference Alan Greenspan, said that the U.S. labor market is “close” to full strength and added that inflation would not be held down much longer by the strong dollar stating “The stronger dollar was a drag on the economy but consumer spending has been strong enough to offset this” and low oil prices.

She also said: “Domestic strength is pushing the economy forward but is being held down by headwinds from the global economy … several factors weighed in the FOMC's decision to be gradual with rate hikes.”

In fact, the Fed Chair didn’t break much new ground since her speech on March 29 in New York.

Anyway, most economists now expect the Fed to raise rates in June.

In Europe, ECB President Mr. Draghi echoed, in some way, Ms. Yellen in warning about uncertainty about the outlook for the global economy stating in the “foreword” of the just released 2015 ECB annual report: “We face uncertainty about the outlook for the global economy. We face continued disinflationary forces. And we face questions about the direction of Europe and its resilience to new shocks.”

No doubt, we all face uncertainty in the global economy apparently.

However, I think, there is a rather tricky question that these dovish central bankers have to answer: “Do we really face any more uncertainty today than in the past?”

Economics is uncertain of course and in an era of considerable structural change, understanding the data may require a little bit more effort.

Today's lower “nominal” world also means that distinguishing “real” from “nominal” data is more problematic as well, but that does not equate to increased uncertainty.  

Of course, there are political risks to growth, but this does not seem to be an especially uncertain economic environment.

When Mr. Draghi writes, “We face questions about the direction of Europe and its resilience to new shocks” he underlines the fact Europe could be headed, once again, for another round of different crises in the coming months.

We still have Greece that doesn’t go away; we have the lurking BREXIT referendum in the UK; we have the huge refugee crisis and now we got the Dutch referendum on April 6 about a rather obscure Ukraine–European Union Association Agreement or Treaty and that has resulted in an overwhelming majority of votes against the treaty, but with an overwhelming majority of Dutch voters "not" voting at all.

Technically the Dutch Parliament has to consider the results of the referendum, but is not bound by its verdict.

That said, it is also a fact the Dutch government is now in no position to ask parliament to ratify the EU-Ukraine Association Agreement that is still pending, and which would make the Netherlands the only one of the 28 EU member states not to have done so.

How all this will turn out in the end is still the big open question.

Nevertheless, what’s interesting is and what those investors who are interested in the outcome of the UK referendum on its EU membership on June 26 is that:
  • For the EU-skeptics the Dutch referendum results is a clear sign of the masses rising up against an oppressive elite and their disquiet with Europe.
  • For the pro-euro forces, the referendum shows the apathetic majority that is largely indifferent, but is not actively opposed to Europe.
  • For the small but impassionate minority, which had 61.1 percent of the votes in the referendum, but only represent 20 percent of the Dutch voters, it has shown them flexing their muscles.
Clearly, the Dutch referendum isn’t a direct read into the UK’s EU referendum other than perhaps the importance of the behavior of the apathetic majority to the outcome of such issues and the critical issue of voter turnout.

As an investor, I wouldn’t underestimate the impact the UK EU membership referendum could have on for instance the value of the British pound that has already weakened substantially against the dollar from about $1.58 in June 2015 to about $1.40 now, which represents a drop of 11.50 percent in 9 months.

In case the UK would vote to leave the EU, the pound could easily drop to $1.20 or even to $1.00 (markets always overshoot when there are sudden important moves) in the aftermath of the referendum.

If that would be the case, which is of course not a sure thing by any means, there is no doubt this would impact overall markets with increased volatility and wild currency swings.


Etienne "Hans" Parisis is a Belgian-born bank economist who has advised global billionaires and governments on the financial markets and international investments. Parisis is based in Panama City, Panama.



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Federal Reserve Chair Janet Yellen, speaking alongside her predecessors Ben Bernanke, Paul Volcker and via teleconference Alan Greenspan, said that the U.S. labor market is "close" to full strength and added that inflation would not be held down much longer.
Yellen, bank, economy, Fed
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2016-50-08
Friday, 08 April 2016 08:50 AM
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