How much longer will markets pay attention to central bankers who make noise? It seems like every time a Fed Governor opens their mouth, the markets go into a tailspin.
Just over a week ago, some Fed Governors said rate hikes may come sooner than you think. Just days later, those statements were contradicted when a couple of other Fed Governors said, “Not so fast on a rate hike! Let’s watch the data.” This last statement has been bounced around more often than a basketball over the last year or so. Every time it’s uttered, it causes market turbulence.
If there is one thing markets hate, it’s uncertainty, and the current Fed policy of waiting is sowing nothing but uncertainty. Yet, the markets continue to hang in the balance on every word. This recent back and forth action has jerked markets around and created volatility (like on September 9, when markets fell by 2% or more, wiping out two months worth of gains in just one day).
To some extent, each meeting, comment, and speech of central bankers is carefully scrutinized. Remember how much attention was given to Chair Yellen’s speech in Jackson Hole last month? Her actual comments were met with yawns, but markets rose modestly. Back in May, several Fed Governors declared a rate hike was likely coming in June, but then back-tracked when the jobs report for May was weak. So much for that! Markets soared right up until Brexit.
So the question is: do central bankers know more than the average trader? They see the same economic data that you and I see. Why can’t we just interpret the facts rather than trying to decode opinions?
They won’t just raise rates for show – the consequences are too dire. Look what happened last December. The market dropped at the beginning of the year and the US economy had a measly 1% GDP growth in the first half of 2016. Former Chair Ben Bernanke once said, “Monetary policy is not a panacea.” It cannot cure all ills and ignite growth, but it could certain stop a raging fire with a giant hose. Fiscal spending could re-charge the economy and increase growth substantially, but that is a political issue.
While the Fed contains some of the most brilliant economic minds, the complexity of Fed policy requires a delicate touch and fine tuning rather than blunt action. Words are just words. Action is far more important. While some believe the Fed could surprise us this week, I disagree. Inflation is not near their target, and they may tolerate higher than expected inflation (more than 2%) before easing off the gas pedal and normalizing rates again.
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