Will there be more QE? A rate rise or cut? Does Janet just want to borrow Marine One to drop cash onto an unsuspecting public? Or was the whole thing a red-herring?
Both the Fed meeting and the Presidential debrief were “closed to press” so we are all none the wiser, except to say that central bank activity is “hotting” up and we can expect more of the unexpected, despite “guidance” to the contrary.
The rumour mill has been in full swing over the past week, and what seems like like every Fed employee being wheeled out to discuss the economy. Cue a lot of head shaking and ‘glass half empty’ comments.
More and more data is coming in below expectations. The first stab at the gross domestic product number for the first quarter is not released until the 28th – the day after the next Fed meeting closes – but the Fed will already have a pretty good idea as the latest Atlanta Fed GDPNow forecast is just 0.1%.
The inference from all this dovish chattering is that they have realized that the rate rise was a big mistake and are about to execute a U-turn – Janet Yellen is no Maggie Thatcher!
A cut back to zero, or even negative, plus perhaps a fourth version of the totally discredited economic gamble known as QE would send the markets into raptures.
Bond yields would fall and equities would soar perhaps taking the S&P 500 to new highs. But how long would the party last? The last two iterations of QE had far less effect than the initial blast, which had more to do with bailing out the banks than trying to boost the economy.
Or could they actually be thinking of actually raising rates again? Highly unlikely. Inflation has ticked up, but is still below the long term trend and over 10 years barely above it. The jobs data is as confusing as ever but not so strong that a rate rise would be a foregone conclusion. There would also be the galvanising effect higher rates would have on the dollar exchange rate.
The odds favour more QE, perhaps allowing the Fed to buy high yield debt where there is more than a little stress right now, and maybe a cut. Either way Janet’s credibility is looking a bit suspect.
We may get some information (or hints) when the International Monetary Fund has its spring conference in Washington later this week. Then again, we might not.
Talking of credibility (or lack of), the initial euphoria of negative rate cuts in both Europe and Japan evaporated very quickly and, instead of their currencies weakening in response to such monetary debasement, they did just the opposite!
In Germany, Schauble (the former minister of finance) has blamed the ECB’s cheap money policy of fomenting the rise of the anti-EU AfD party, which now polls at 14%. While one can debate how much of Germany’s public stance is posturing, the tide is clearly turning against Draghi in Europe’s most prosperous and powerful nation.
And, as Reuters adds, this weekend’s scandal marked a new low in the often fraught relations between the eurozone’s biggest country and the central bank’s Italian chief, who has recently bemoaned what he described as the “nein zu allem” – “no to everything” approach – a deliberate swipe at Germany.
We live in ‘interesting’ times. I’m not sure what’s going on, and I’m not convinced the world’s central bankers do either.
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Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Clive’s views are his own and do not constitute financial advice.
