Fed chair soothes equity markets during testimony
The chair of the Federal Reserve, Janet Yellen, recently testified before the
U.S. House of Representatives Committee on Financial Services in which within her prepared statement Ms. Yellen reaffirmed her belief that the economy was progressing at a relatively moderate pace. In addition, in our opinion Chair Yellen also made statements that appeared somewhat more accommodative than investors had anticipated she would make.
Yellen noted that “since my appearance before this committee in February, the labor market has continued to strengthen. Job gains have averaged 180,000 per month so far this year, down only slightly from the average in 2016 and still well above the pace we estimate would be sufficient, on average, to provide jobs for new entrance to the labor force. Indeed, the employment rate has fallen about ¼ percentage point since the start of the year, and, at 4.4% in June, is 5½ percentage points below its peak in 2010 and modestly below the median of Federal Open Market Committee (FOMC) participants’ assessments of its longerrun normal level.”
We print such a lengthy quote to point out the number of jobs that have been created thus far in 2017, the historically low unemployment rate and the consistent pace at which the economy continues to advance. If history is any guide and all things being equal, this would suggest higher interest rates. However, there are some impediments to higher interest rates including the facts that global interest rates remain very low and wage growth has been subpar at best.
Since the recession ending in 2009 we have been of the belief that interest rates would remain lower for a longer period of time than is the norm. In addition, we believed and continue to believe that interest rates will remain lower for longer than the markets expect. This belief was bolstered by further statements by Chair Yellen.
“I will now turn to monetary policy. The FOMC seeks to foster maximum employment and price stability, as required by law. Over the first half of 2017, the Committee continued to gradually reduce the amount of monetary policy accommodation… The Committee continues to expect that the evolution of the economy will warrant gradual increases in the federal funds rate over time to achieve and maintain maximum employment and stable prices. That expectation is based on our view that the federal funds rate remains somewhat below its neutral level – that is, the level of the federal funds rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel. Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance.”
Again, we hate to drone on. However, the last statement by Chair Yellen is most supportive of our belief of lower interest rates for a longer period than expected. This means that the equities remain attractive relative to other asset classes. However, it also means that the longer this misallocation of assets lasts, the larger the disclocation becomes and the greater the potential repercussions.
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