Fed policy decisions hardly make a dent
Welcome to a world in which the Federal Reserve and economic data no longer have much influence on the value and fluctuations of US stocks, bonds and the dollar. It is President Donald Trump’s economic policies that are now in control of asset markets, through both the measures that are implemented domestically and the US’s relationships with other countries.
Last week, Josh Brown, the insightful and widely followed market observer, remarked in a Tweet: “There is a Fed meeting today, which will get less attention than the Pro Bowl.” He compared what once was the main focus of markets to the annual “all-stars” game in football, which struggles mightily to get much attention, let alone any respect.
The next day, Bank of England Governor Mark Carney said central banks were coming to the end of their “15 minutes of fame”.
This is a new situation for institutions that, as most market participants would readily acknowledge, have been the main determinant of asset prices in recent times. Actual and anticipated Fed policies have played a critical role in repressing financial volatility and pushing asset prices higher. In the process, exceptional Fed interventions decoupled those two market outcomes from messy economic and political fundamentals.
Data releases also had an impact on asset prices, though it was much more limited, and operated mostly through their implications for Fed policy.
Underlying this were three strongly held presumptions about the economic, policy and political environment for financial markets: The economy was stuck in a low-level growth equilibrium that was stable, even though it was frustratingly sluggish and insufficiently inclusive; that systemically important central banks (not only the Fed but also the Bank of England, Bank of Japan and European Central Bank) were willing and able to rely on effective unconventional monetary policy, regardless of the potential for collateral damage and unintended consequences; and that other policy tools were sidelined by a highly polarised Congress and the lack of single-party control of both the executive and legislative branches.
The November elections changed this, as has the approach taken by the Trump administration since it assumed office on January 20.
By delivering Republican majorities in both houses of Congress and a president intent on moving quickly to shake things up (as he promised during his campaign), the elections have relegated Fed policies and data to the minor leagues among major market movers. And, at least for now, central bankers are likely to welcome this state of affairs, especially given the political pressure on their operational autonomy.
Last week was a good illustration. The Fed policy announcement was largely a non-event for markets. Also, the week’s stronger-than-expected economic data, including for manufacturing and jobs, hardly caused a ripple.
By contrast, the White House has been a market mover. Over the last two weeks, the deregulatory signal associated with the executive order reviving the Keystone Pipeline pushed stocks higher, while the announcements associated with travel restrictions and a possible 20 per cent tariff on Mexico pushed them lower. Interventionist-inclined deviations from long-standing practice on dollar commentary — namely, away from limiting it to a Treasury secretary who reiterates the benefits of a “strong dollar” — lessened the conviction of those trading currencies on the basis of traditional factors.
And, early last week, supportive White House comments enabled a single sector of the S&P index (biotech) to avoid downward pressures that took all other sectors lower.
The good news is that markets are evolving away from an artificial, and ultimately unsustainable, driver of prices and volatility (the Fed’s purchases of assets, which don’t fundamentally alter the secular and structural sources of growth).
They now are increasingly sensitive to more genuine drivers in the form of actual and potential measures that influence productivity, trade, corporate investment and widespread economic incentives. The less good news is that this transition comes with a considerable degree of uncertainty, including what is developing into a tense and epic tug of war between the prospects for orderly reflation and those for disorderly stagflation.
The writer is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council. He was chief executive and co-chief investment officer of Pimco.