Last Friday we got the latest wisdom from Janet Yellen, Fed Chair, in a speech to the Jackson Hole conference for central bankers and other assorted Marxists. It was a wonderful example of how to confuse and baffle markets.
There was something for everyone. If you wanted to hear that the Fed intends to normalize monetary policy and raise rates ‘soon’, you got it. She said the case for a rate hike had improved in recent months due to continuing strength in labor markets.
If you wanted to hear that the Fed has the market’s back and was ready to do more to save the world, you got that too. Janet talked about $3 Trillion in additional asset purchases in that could be unleashed if needed and suggested that the range of assets they purchased could be widened. Exactly the opposite of her first message.
The market’s initial kneejerk reaction was a slide in the S&Ps as the dollar firmed. Gold dipped $10 back to the unchanged mark and the bond market slipped. Thirty seconds later, all those moves reversed as markets realized that there was probably no rate hike coming in September. The S&Ps rallied to a new high for the day. The dollar index slumped to a new low for the day. Gold popped $20 to a new high for the day. The long end of the treasury curve also rallied to a new high for the day.
About an hour later, the Fed’s Vice Chair, Stanley Fischer, went on CNBC to explain that Janet’s speech was consistent with the possibility of two rate hikes this year and that next week’s jobs report would be a key factor in the decision, which of course now makes next Friday’s jobs number “the most anticipated number of the year.” Again. And then the markets reversed for a second time.
You probably think I’m making this up. I am not, dear reader. I watched the whole thing. They have no idea what they are doing. Their policies aren’t working. They are afraid to raise rates because they don’t know what that will do to the markets and the economy. They are afraid to let you know that they are afraid to raise rates because then you won’t have any confidence in them. So they continue to say they can and will raise rates by a tiny, tiny bit someday soon when the data says they should.
It’s like that date in high school who shows a bit of leg and the evening begins to look promising but then she asks to go home early because she has a test in the morning.
One thing the Fed does not need to worry about is its credibility…it’s been slipping for years. They completely failed to foresee the housing bubble and the great financial crisis that followed. As a result, faith in the Fed has plunged. People had high confidence in Alan Greenspan for much of his tenure, but that confidence tailed off towards the end. Confidence in Ben Bernanke declined further, and confidence in Yellen is at or near record lows.
The following chart shows the shift in confidence under the last three Fed chairs.
The above chart is from the Wall Street Journal article Years of Fed Missteps Fueled Disillusion With the Economy and Washington.
In the early 2000s, confidence in Chairman Greenspan often exceeded 70%. An April Gallup poll found that only 38% of Americans had a great deal or fair amount of confidence in Ms. Yellen while 35% had little or none.