I almost felt sorry for Fed Chair Janet Yellen today as she delivered her semi-annual Humphrey-Hawkins testimony to the House Financial Services committee.
I say "almost."
That’s because whatever flak Yellen took from committee members, she and her cohorts at the central bank have pretty much brought it on themselves.
Ms. Yellen stepped into the Congressional lion’s den today. She faced hungry cats from both parties, as both Republicans and Democrats appeared eager to strike at the Fed chair over interest-rate policy, regulatory decisions and Fed governance.
That hostility was compounded by a contingent of workers from the labor activist group "FedUp." The group’s green shirts brandished slogans such as "Whose Recovery?" and "Let Our Wages Grow."
The real news, however, wasn’t made by headline-seeking lawmakers or the FedUp clan.
The real news is that the market was left basically confused about what the Federal Reserve is going to do next.
The result was volatile Wednesday trade that saw the Dow up more than 100 points, then down more than 100 points to close near session lows.
The gains in the market early on came largely from Yellen’s comments that acknowledged the current struggles in the financial markets, China and other foreign economies. She also acknowledged that inflation expectations were declining.
Here’s the key quote from Yellen’s prepared testimony to Congress:
Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar. These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices provide some offset.
These comments didn’t explicitly take any future rate hikes off the table. They did, however, represent what could be called a "downbeat undertone" on the economy.
Traders read her comments as a signal of the Fed’s cautious approach to raising rates again in the months to come.
Interestingly, while Yellen related the Fed’s caution about financial conditions, she also talked about the possibility of alternative policies to rate hikes.
This included the possibility of "negative interest rates."
Yellen repeatedly said she did not expect the Fed to do a reversal on policy and begin to cut rates from here. But the Fed Chair also didn’t rule out a backpedal on lower rates.
I do not expect the FOMC is going to be soon in the situation where it’s necessary to cut rates … Let’s not forget, the labor market is continuing to perform well, to improve. I continue to think many of the factors holding down inflation are transitory. … We want to be careful not to jump to a premature conclusion about what’s in store for the U.S. economy.
Those Yellen comments were followed up later by the further comments on negative rates, a situation where banks holding excess reserves at the Fed would have to pay the Fed to keep the money at the central bank.
Yellen told the committee that the possibility of negative rates is:
… something that, in light of European experience, we will look at, we should look at — not because we think there is any reason to use it, but to know what could potentially be available.
What could potentially be available is an economic mess that confirms what many of us have known for years. That is, the Fed really doesn’t know what it’s doing.
A long time ago, I was taught to beware the "two-handed economist."
The reason why is because if all possibilities are on the table, then all policies are on the table, too.
That might be true in the ontological sense. But in a Wall Street and investment sense, it doesn’t provide any clarity at all on what the Fed is likely to do. In fact, it just adds a layer of confusion to an already confused market.
What my takeaway from the Yellen testimony basically comes down to is that the Fed might hike rates later this year if the financial conditions become more conducive to growth.
Or, it might cut rates, implement "QE4," or even go the way of Europe and Japan and start charging banks for keeping reserves at the Fed.
Today’s testimony reminds me that you can either walk on the left side of the road, or the right side of the road. But walking in the middle of the road is sure way to get run over.
Elsewhere in the news today …
Stocks finished a Fed-inspired volatile session down nearly 100 points, as traders sold positions into the close. Weakness in Dow component Disney (DIS) after its earnings disappointment weighed on the Industrial Average.
- Donald Trump and Bernie Sanders won their respective party primaries in New Hampshire. The presidential race now moves to down the East Coast to South Carolina.
- Republicans Chris Christie and Carly Fiorina both dropped out of the race today after poor showings in the New Hampshire vote.
- Whole Foods Market (WFM) shares climbed after hours following the company’s better-than-expected EPS of 46 cents vs. estimates for 40 cents.
- The U.S. dollar reversed early gains to finish lower vs. the yen and the euro. The reversal in the greenback was similar to the action in stocks.
- Tuesday was a record trading-volume day for oil. Chicago-based CME Group said more than 1.6 million contracts of WTI Light Sweet Crude Oil changed hands in yesterday’s session. WTI fell 5.9% yesterday, and it was down another 1.7% today.
- Oil CEO "very bearish" on oil. Robert Dudley, CEO of BP plc (BP), said oil prices should stay low until at least midyear. He suggested that storage problems will have to worsen to the point that producers must cut back on supply.
Good Luck and Happy Investing,
Uncommon Wisdom Daily