After the conclusion of Janet Yellen’s long-awaited speech from Jackson Hole, the Fed has done what it tends to do all too often: nothing.
It is incredible to think of the energy and time spent over the past few weeks, focusing on this ‘huge’ event.
Regardless, the outcome was foreseeable and exactly what we predicted. In an August 23rd article, The Fed Contemplates $4 Trillion Stimulus, I wrote,
“It has become obvious the Fed will not raise rates, that the Fed cannot raise rates. Just read the economic data coming out week after week and this becomes a matter of fact.”
Not exactly a bold prediction, the real economy is hurting, failing to grow more than 1% over the past 3 quarters on average. Furthermore, the Fed has raised rates only once (symbolic quarter point in December 2015) since before 2008.
Bloomberg provided Yellen’s speech in an annotated form, below are the strongest words the Fed Chair could muster:
“Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook.”
Almost every paragraph contains one form of a caveat or hedge. When you factor in the key words, ‘always depend’, it becomes apparent, Yellen didn’t really say anything. She is playing the ultimate game of chicken and up until this point, have the U.S. markets taking her seriously. Gold was not sure how to react, first rallying about $10 an ounce, but then selling off to just below $1,320 per ounce.
Fed predicts lower rates for longer
Yellen and her staff are predicting long run interest rates will remain lower into the foreseeable future. She stated, “Forecasts now show the federal funds rate settling at about 3 percent in the longer run. In contrast, the federal funds rate averaged more than 7 percent between 1965 and 2000.”
Where does this leave retirees, desperate for yield or a return on their life savings? Gambling in the stock market or receiving far fewer gains in bonds or other fixed investments.
Yellen hints at negative rates
Janet Yellen went on to comment that, “By some calculations, the real neutral rate is currently close to zero, and it could remain at this low level if we were to continue to see slow productivity growth and high global saving.”
Citing a high global savings rate is ironic and should not be taken seriously. While the U.S. savings rate did increase following the Great Recessoin, it has resumed its downward trend that began decades ago. If anything, the “high global saving” she referrences is representative of a broke America, where average citizens no longer have money to spend or save. The collapse in the velocity of money, which hit another all-time record low of 1.448 in Q2 2016, is proof of this.
Velocity of Money
According to the Federal Reserve Bank of St. Louis the velocity of money “…is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.”
Yellen prepares for additional stimulus
Yellen what appears to be a recent Fed Staff working paper released last weekend titled “Gauging the Ability of the FOMC to Respond to Future Recessions”
The “…paper takes a different approach to assessing the FOMC’s ability to respond to future recessions by using simulations of the FRB/US model. This analysis begins by asking how the economy would respond to a set of highly adverse shocks…”
Yellen describes a scenario that would involve an additional $2 trillion in stimulus and negative interest rates.
She explains that
“…the federal funds rate would fall far below zero if policy were unconstrained, thereby causing long-term interest rates to fall sharply. But despite the lower bound, asset purchases and forward guidance can push long-term interest rates even lower on average than in the unconstrained case (especially when adjusted for inflation) by reducing term premiums and increasing the downward pressure on the expected average value of future short-term interest rates. Thus, the use of such tools could result in even better outcomes for unemployment and inflation on average.”
Yellen quickly begins her next statement with “Of course, this analysis could be too optimistic.”
We wrote about this white paper in an article titled The Fed Contemplates $4 Trillion Stimulus from earlier this week.
I’ll leave you with this final statement from Yellen, who heads the most powerful central bank in the world, which prints the sole global reserve currency:
“…our understanding of the forces driving long-run trends in interest rates is nevertheless limited, and thus all predictions in this area are highly uncertain.”
This “highly uncertain” leadership has created a landscape where security can only be found through diversification in currencies, precious metals and hard assets. The Fed can only supply so many caveats or hedges before the market no longer listens. For the moment, the U.S. markets are continuing to take her seriously.
This article represents solely the opinions of Alexander Smith. Alexander Smith is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.