Chair Yellen, please take a victory lap!
Professor Jeremy Siegel gave one of the best descriptions of present market conditions in a CNBC interview last week. When asked about the Federal Reserve and the chances of a September rate hike he said, "The anticipation of raising rates is worse than the actual act of raising rates for the market." Being the wonderful teacher he is, the message was clear: Nothing is as bad as your imagination makes it out to be. The truth is that the latest Fed minutes, which gave us a blinding glimpse of the obvious, showed the central bank can and should move in September, even with looming concern about China.
There are two good reasons: First, the Fed needs to show the financial world that they are consistent in their "data-dependent" stance (perfect data do not exist in this world). Second, to paraphrase Paul McCulley, for Janet Yellen to take a victory lap. The hardest pill for us to swallow is the waiting game. Let's understand that we have never been in a zero interest-rate environment like we are now and any move by the Fed from these historically low levels would be … well, historic! But the moves will certainly be slow and gradual with no drastic surprises. Let's keep in mind that the market has traded in a counterintuitive manner for the last seven years and a dogmatic approach to the end of ZIRP (zero interest-rate policy) would be shortsighted. With strong numbers coming from the housing sector, coupled with solid, consistent job creation over the past few months, the time has come for Janet Yellen and company to finally make their move and raise rates.
When quantitative easing was introduced to the United States, the unanimous consensus among market observers was that it would end badly. The final result was thought to be the debasing of our currency and runaway commodity inflation. Brilliant central bank watchers became "soothsayers of doom," warning of the impending disaster created by such reckless monetary actions. Wrong! Neither inflation nor dollar debasement became a reality and the fears generated by those worried about an expanding balance sheet have all but disappeared. Guess what? The Fed was right.
One thing we must be reminded of is that the Fed has a dual mandate. Not only must they be concerned about the prospects of inflationary or deflationary pressure but they need to be the vanguard of growth for the entire economy. In a business climate which fosters over-regulation, tax ambiguity, hints of protectionism and the total lack of pro-growth policies out of the congress, this dual mandate becomes a heavy burden. To borrow an old Armenian saying, the Fed has pulled a two-horse wagon alone. And it has done a magnificent job.