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Investors Seek Clarity on Fed's Policy Direction

Investors Seek Clarity on Fed's Policy Direction

Tuesday, 27 June 2017 09:48 AM Current | Bio | Archive

In U.S. politics, the Trumpcare health care reform has run into more problems.

The Congressional Budget Office (CBO) suggested that 22 million citizens would potentially loose coverage and that has given cover to Republicans in the Senate who wish to vote against.

Republicans can only afford to lose two of their 52 senators for the bill to pass and as things stand at the moment of this writing, it doesn’t look like the bill is going to pass.

In recent years, the value of diversity in decision making has been widely understood in business. Most companies strive to have a wide range of opinion and views, in order to make better quality decisions.

In that light, a bill crafted in secret by a group of middle-aged men is not, perhaps, guaranteed to lead to the most successful outcome.

For markets as well as for investors, it is the time spent on this proposal that is the issue. The longer this debate drags on, the less time there is to spend discussing fiscal reform.

Something like the Muslim travel ban, which was more or less upheld yesterday, has less of a direct bearing for markets as that is a court issue and therefore has not been occupying the legislative time table, although the ban may have an indirect impact on capital flows and possibly tourism.

Besides all that, today we’ll also get an avalanche of Fed speakers with Fed Chair Yellen on top who is expected to speak at 1:00 PM Eastern Time (ET).

We’ll also have the remarks of Minneapolis Fed President Neel Kashkari, San Francisco Fed President John Williams and Philadelphia Fed President Patrick Harker, who all will be working down the list of Federal Open Market Committee (FOMC) 2017 members.

The Fed’s real task right now is to remind markets and thus investors that there is no need to obsess over every single data point.

The long-term trends are what should drive Fed policy as in fact should be the case with every important central bank like the ECB, the Bank of Japan (BOJ) and others.

Markets as well as long-term investors could do well not to forget that central bank policy is only “influential” in the economy in the longer term.

Technical quirks in the data as we with consumer price inflation (CPI) and unreliable and frequently revised data as with GDP should not inform Fed decision making.

Indeed, these data should really not inform anything at all, but markets still react to it and that’s why these series of data cannot be overlooked, at least not from a short-term point of view, which is of course the universe of traders, but not the universe of long-term investors.

The U.S. economy is operating at around trend growth with full employment and a normal inflation rate.

That said, it is a fact that the glaring abnormality in the United States is Fed’s policy position.

The question for today is whether we’ll get somewhat better clarity as to the timing of the Fed’s passive quantitative tightening program.

Will the Fed start in September or delay until later this year?

Over in Europe, we already heard ECB President Mario Draghi today, who didn’t announce anything that could be seen as we’ll get an ECB tapering anytime soon, but instead he said: “A considerable degree of monetary accommodation is still needed for inflation dynamics to become durable and self-sustaining. So, for us to be assured about the return of inflation to our objective, we need persistence in our monetary policy … we need prudence. As the economy picks up we will need to be gradual when adjusting our policy parameters, so as to ensure that our stimulus accompanies the recovery amid the lingering uncertainties.”

There is a danger in listening too closely to Draghi who has yet to undergo rehabilitation for an addiction to “easing.”

Other members of the ECB Governing Council are more concerned to scale back the ECB bond buying program and, in a consensus decision on the timing of moderating quantitative policy, to the point of reducing the balance sheet to GDP ratio, it is not necessarily the case that Draghi will occupy the middle ground of that consensus.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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The glaring abnormality in the United States is Fed’s policy position.
fed, policy, investors, economy, rates
Tuesday, 27 June 2017 09:48 AM
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