At Janet Yellen’s latest speech in Rhode Island, she states, “… If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy”. Wow! Either some poor intern has really mucked up some serious reports for dear Janet or this is just more of the Fed’s Hawk/Dove public sideshow still attempting to negate rational expectations by creating confusion around monetary policy actions. I know where my bets are going but I feel like I need to have a quick chat with dear Janet. So here goes….
Well Ms. Yellen, I call your bluff and let me show you your tell in the following chart.
You see, I get that you find yourself in a terrible conundrum. You understand as well as anyone that managing the trickle-less down recovery and the resulting tenacious dislocation between the market and the economy is becoming unmanageably expensive; about $13T to date. And while the hint of a rate hike over the past year has sent the dollar up some +15%, some suggesting a sign of strength for the American economy, it really is not helping the situation now is it??
We all like to pretend that we are at full employment but deep down we know all those who moved out of the unemployment line moved into the welfare/disability/social security line rather than into employment. This is clear by way of the labour participation rate dropping an equivalent amount by those falling off the unemployment radar. And what is full employment anyway, right Janet? Why, I can remember not too long ago, that 6.5% was our targeted full employment but let’s not split hairs over benchmarks. 6.5% or 5.5% or whatever we decide full employment is going to be it really doesn’t matter but for perception, that I know we agree on.
And that’s kinda the thing isn’t it Janet? The 6 years of funding a trickle-less down recovery, hoping and praying that the market/economy dislocation (which is inherent in such a strategy) is reconciled by a rising economy rather than a crashing market this time around is beginning to wear thin as a viable strategy. I feel your pain. I’ve bled a fair bit of premium betting on a reconciliation of the dislocation as you have bled a fair bit currency, neither of us getting it right so far. Forgive me this cheap shot, but I earned the premium I’ve bled and so it seems just a bit more real to me than to you I’m sure. Nonetheless I can imagine things must be getting a little stressful there over at the Fed.
But going forward what is it that we are to do Janet? We’ve lowered oil to offset rising food prices and to stimulate consumption but still demand is anemic at best. And like a rising river in the face of being up shit creek without a paddle, we now see signs of supply side inflation creeping in as well. This doesn’t bode well for real incomes and thus the perception of a stable consumer. Consumer debt is back to peak and overflowing levels. There just isn’t much more consumer debt to be distributed in order to keep selling all those cars and guitar lessons. What are we to do Janet, when uncontrollable forces just refuse to fall into place??
Well Ms. Yellen I am, like you, still betting on the reconciliation, however, I expect we remain on opposite sides of this trade. Now I know, I know I should never fight the Fed. I get it. But I tell you what, sometimes the sun even shines on a dog’s ass once in a while. And so I call your bluff Ms. Yellen. As Kenny Rogers once sang so sweetly, “I can see you’re out of Aces”.
By Thad Beversdorf, Chief Global Economist for ABX