The Federal Reserve was never hiking rates four times this year. The stock market didn’t believe it, and now Fed Chair Janet Yellen has all but explicitly acknowledged it. Indeed, Yellen’s blockbuster speech Tuesday assuring that the central bank would go slowly on future adjustments to monetary policy only caught some of the market by surprise.
Yellen, speaking to the Economic Club of New York, noted that the Federal Reserve should proceed with caution in adjusting policy. Recent readings on the strength of the U.S. economy since the beginning of the year have been mixed and less favorable.
On the policy front, Yellen said research suggests that, with a funds rate at near zero and increased uncertainty, the best policy is greater gradualism. “Still, the Fed can hike if the economy grows faster”, she said. But if the economy falters, she added, the Fed can “provide only a modest degree of additional stimulus.”
The Fed chair has been facing a Mimi-revolt as other officials, including Philadelphia Fed President Patrick Harker and the Atlanta Fed’s Dennis Lockhart, have said in recent weeks that the Fed should consider an April hike. Federal Reserve projections from earlier this month showed that a majority of officials (9 of 17) expected only two hikes in 2016.
Yellen’s comments reflected a variety of fears, much of them centered on the global landscape. The remarks came amid a deteriorating economic picture, though a U.S. recession still is considered unlikely by most economists. The Atlanta Fed now expects gross domestic product to gain just 0.6 percent in the first quarter, down from about 2.7 percent in early February. The Atlanta Fed’s GDP-based recession indicator shows just a 10 percent chance of recession, though that has not been updated since Feb. 4.
As David Rosenberg, chief economist and strategist at Gluskin Sheff, pointed out, she used the word “global” 11 times, which was seven more than her speech to Congress in February, and “uncertainty” 10 times, up from three in the last speech.
There was a point recently where markets were beginning to buy a rate-hiking Fed, with expectations of a move around mid year and, possibly, a second in December.
No more, after Yellen’s speech, the market believes the only likely increase will come in November or December. According to CME Group data, there is a better than 50 percent chance of a rate hike in November and only a 49 percent chance of a September hike.
“Whenever a central banker is uncertain, rest assured that the only certainty is that he or she does nothing,” Rosenberg said in his daily report for clients. “That was the message from Yellen’s speech. Rate risk is off the table, but the reason for it, a lack of growth visibility.
Ultra-accommodative monetary policy is showing its limits in other countries and Yellen’s dovish tone is being inspired by global weakness. The Fed, with its seven years of zero rates and $3.7 trillion worth of money printing, has faced criticism for being too market sensitive.
I have to admit that I was completely fooled by Janet Yellen and her hawkish committee members. Like most investors, I didn’t think that four rate hikes were in the cards for 2016. However, I really thought that the U.S. economy was strong enough to justify two rate increases.
In my humble opinion, the Fed is suffering from analysis paralysis, the state of over-analyzing a situation so that a decision or action is never taken, in effect paralyzing the outcome. What could be next, currency wars!