Janet Yellen pulled the markets offside with a hard count yesterday. Instead of a hike, we heard about global weakness that suddenly warrants the Fed’s attention. The market reacted as though there was a hike – you could say we’ve been in the red zone the last two days (I can’t help myself). Most concerning is that the Fed continues to move the goalposts (last one, I swear). Janet Yellen has insisted that under her guidance, the Federal Reserve will be data driven, but so far this hasn’t played out. The first bogey was unemployment. When unemployment recovered quicker than expected, they kept lowering the target, delaying a possible rate hike. These delays were understandable as there was certainly room for improvement in the economy. Now, however, the US economy is looking quite robust. Unemployment has vastly improved and GDP looks good. Inflation is low, but some top-of-mind costs (school tuition, healthcare) continue to rise quickly.
The Fed’s dual mandate of low unemployment and stable prices doesn’t seem to cover the global economy. This is starting to feel more like the Ben Bernanke Fed that some people characterized as day-trading the economy based on how the stock market was doing. Since quantitative easing was introduced, the market has responded to looser policy with cheers and tighter policy with boos. It has been a case of bad news being good news (bad economic news prompting further easing) and good news being bad news (Bernanke hinting at QE’s end being met with a market tumble). It seems like we have finally hit the point where bad news is actually bad news again.
ZIRP (Zero interest rate policy) is an emergency state. The market is recognizing that not only is the emergency over, but it is becoming counterproductive to continue milking a crisis that ended half a decade ago. When the Fed continues to change the rules in the middle of the game it loses credibility and extends market uncertainty. There will be pain associated with a raise in rates, but it should be seen as a return to normal, not so much as tightening.