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Monetary Policy

Yellen says the Fed will be less predictable

It’s ‘Round Two’ for Janet Yellen.

The Federal Reserve chair told the Senate Banking Committee on Tuesday the central bank is in no hurry to raise interest rates. Yellen once again stressed the word “patience.” On Wednesday, she appears before the House of Representatives’ Financial Services Committee.

Yellen talked about a solid and improving economy but also about disappointing labor force participation and anemic wage growth. She said it would be several months before the Fed would boost rates. Stocks soared on the news with both the S&P 500 and Dow closing at record highs. The Nasdaq also saw healthy gains and is now less than 1% away from the 5,000 milestone.

janet_yellenBut The Wall Street Journal’s Pedro da Costa called Yellen’s testimony “hawkish” because, he says, Yellen “seemed fairly willing to leave the idea of a June interest rate hike on the table which many in the market had not been expecting.”

“In a sense, the market’s reaction is surprising,” da Costa told Yahoo Finance in the accompanying video. “Market reactions are often erratic. They can turn around quickly,” he said.

While the Fed clearly wants to see more improvement in the economy and signs of higher inflation, Yellen did give a sort of road map to an initial rate hike and any hike that follows. That means a move away from forward guidance. The Fed will now look at data each meeting and decide from there what to do with interest rates. The Federal Reserve has not raised rates since 2006.

“It’s more normal in a sense,” says da Costa. “The last time the Fed raised interest rates, they used an expression that said they would continue to raise rates at a measured pace and that was taken to mean a quarter point per meeting,” he says, “And the Fed wants to be less predictable this time around.”

Yellen’s testimony Tuesday was the Fed’s biannual update for the Senate Banking Committee on monetary policy. There were a few fireworks. When asked about Senator Rand Paul’s Audit the Fed bill, Yellen repeatedly squashed the idea that the Fed needs to be audited. She made the point that the Fed is already audited financially and called the legislation a ploy to politicize monetary policy.

fed_funds_rateThe toughest back-and-forth came from Massachusetts Democratic Senator Elizabeth Warren. Warren wanted ‘yes’ or ‘no’ answers from Yellen about Fed General Counsel Scott Alavarez who in recent comments took a portion of the Dodd-Frank financial reform to task at a public meeting. Warren wanted to know if this reflected the views of the Fed.

“Yellen was a little be evasive on that one,” said da Costa.

The markets and Fed watchers will listen closely to what Yellen says Wednesday morning as well.  But da Costa says her message Tuesday was pretty clear: “This is a chairwoman that is getting ready to raise interest rates and that is getting ready potentially to start as soon…as March changing some of the language to signal to the markets that rate hikes could be coming as early as June.”

Source:  Yahoo! Finance (finance.yahoo.com)

Stocks close lower for third day as investor confidence wanes

U.S. stocks closed lower Thursday, logging a third straight day of declines, as investor confidence dwindled ahead of a speech by Federal Reserve Chairwoman Janet Yellen.

Weekly data on Thursday showed first-time claims for jobless benefits rose 3,000 to 267,000, a level which continued to signal a healthy jobs market, while durable-goods orders were weak, falling 2% in August. New-home sales rose 5.7% in August to an annual rate of 552,000, topping forecasts.

The Dow Jones Industrial Average DJIA, -0.48% declined 78.57 points, or 0.5%, to close at 16,201.32, overcoming its earlier 264-point deficit. The Dow’s biggest decliner was Caterpillar Inc. CAT, -6.27% which said it would cut 10,000 jobs by the end of 2018.

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The S&P 500 index SPX, -0.34% fell 6.52 points, or 0.3%, to finish at 1,932.24, after being down as many as 30 points earlier in the session. Eight of the S&P 500’s sectors were in the red, led by a decline in the health care sector, which was down 1.2%.

Meanwhile, the tech-heavy Nasdaq Composite Index COMP, -0.38% shed 18.27 points, or 0.4%, to close at 4,734.48. Earlier in the session, the Nasdaq was off by as many as 83 points.

Even though stocks rebounded off their session lows, investors are reluctant to step up and buy the dips amid a general lack of confidence, said Robert Pavlik, chief market strategist at Boston Private Wealth. Many investors expect stocks to test lows set on Aug. 25, when the S&P 500 closed at just under 1,868, and the Dow finished at 15,666, he said.

“Everybody right now has become a technical analyst because this market action is not predicated on economic news, earnings, or overseas action,” Pavlik said. “There’s just a general lack of confidence and people are confused and when that happens, they don’t buy stocks.”

“People see smoke, they don’t see fire, but they run away,” Pavlik added.

Colin Cieszynski, senior market analyst at CMC Markets, told MarketWatch that the market has reached a turning point in which the expectation for a rate increase are no longer viewed as a negative and that worries about persistently low inflation and global growth have taken center stage.

Planned jobs cuts at Caterpillar, which has been struggling along with the mining and energy sectors, offer further signs that slumping commodity prices may be weighing on the Fed’s 2% target for inflation.

U.S. stocks finished in the red for a second straight session Wednesday, as a rally in crude oil fizzled out and the commodity closed at the lowest level in over a week. Oil prices CLX5, +1.46% rebounded Thursday in choppy trade.

In a heavily anticipated speech, Yellen will speak on inflation dynamics and monetary policy at the University of Massachusetts Amherst at 5 p.m. Eastern. Investors are looking for comments about last week’s policy meeting and the decision to leave interest rates on hold. But analysts don’t expect her to offer clues on the timing of a rate increase.

Source:  www.marketwatch.com

How the Fed’s decision was right but oh so wrong

The Federal Reserve’s Federal Open Market Committee voted last week to keep interest rates unchanged and the market, while in my opinion was pricing in a slight increase, didn’t like the unchanged policy.  Even though the Fed’s decision was short-term correct, long-term, the Fed just handcuffed themselves.

Their decision to not raise rates was good from the perspective that the U.S. economy was growing, albeit not at a great rate, and that inflation was low and forecasted to stay low.  What really scared the Fed though was everyone else.  Emerging Markets and China in particular.

It’s no secret that China manipulates their currency and stock markets, and that makes precise calls on their economy almost impossible.  It’s possible that the news that comes out is really half as bad as things really are and that puts a stress on our ability to gauge how the second largest economy in the world is doing.

So why could this be a bad decision?  Well for that, we look at Greece.  Now the U.S. is not Greece and we won’t be.  However, with a zero interest rate policy that we currently have, the Fed has no bullets left if our economy goes sour, which is possible.

We believe that corporate earnings for the third quarter will be disappointing, and will be the catalyst that leads this market lower.  The key area on the S&P 500 is really around 1820, almost 100 points from the close as of the date of this post.  I’m very confident we will revisit this level and test it.

Will there be buyers down there?  Who knows.  I hope so, because if there isn’t, things could get real ugly, real quick.  The next area of support would then be around 1738, and you’re talking around 13,800-14,200 on the DJIA.

What can the Fed do?  Well they can’t do what Greece did which is to have a negative interest rate environment, which is where you actually pay the bank to hold your money and earn nothing.  Most likely we will end up with an inverted yield curve which will put deflationary pressure into the economy which is not good at all.

By not raising rates even slightly, the Fed has bet that the economy and corporate profits are going to be robust and growing.  We think otherwise.  Damned if you do, damned if you don’t.  They didn’t.

The Fed’s no win situation

Well, remember where you were around 2:15pm Eastern Time on September 17th, as the Federal Open Market Committee of the Federal Reserve come out with their decision on whether to hike interest rates on borrowing.

Honestly, I can see the case for both sides:
Pros –
Unemployment rates have been down and the job market is listed as strong.

The housing market has improved and in some areas, the market’s are red hot, maybe too hot. Regardless, construction numbers seem strong, and the trend of that has been established.

The market is just in an overdue correction mode. It hadn’t seen a 10% retracement in years.

Cons –
The unemployment number you see the first Friday of every month doesn’t include people that are working part-time or have given up on finding work. So you could make the case that it’s not accurate or indicative of the real labor situation.

New non-farm payrolls are not peaking but basing and somewhat declining.

The market correction was not just a correction. Within 15 minutes of the opening on 8/24, the Dow Jones Industrial Average was down over 1000 points. This shows how vulnerable the market still is, and any knee-jerk announcements by anyone (China, the Fed, etc.) can cause an immediate and violent reaction.

What now?

Volatility in the markets due to fiscal policy uncertainty has really made this market a roller coaster. I still like writing options and selling volatility because of the premiums that we’re seeing.

I absolutely have no positions going into the Fed’s announcement Thursday. There are only a handful of folks on CNBC that I like to follow, and they have all came out and said what I’m also believing: You could be handed the Fed’s decision and their reasoning behind their decision before anyone else got it, and you still wouldn’t know which way to play it.

We’re going to let the market forces work. We are still in a downtrend off a steep and long uptrend. If the market rallies, I’ll be looking to sell call-side spreads.

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