WHAT’S IT GOING TO BE?
Rate rise transparency is really clear as mud, Janet
IN February, Federal Reserve Chair Janet Yel
len told a Senate Finance Committee the economy was moving forward, and we could see a rate rise later in the year.
Well, it’s later in the year and the Fed is meeting this Wednesday and Thursday, with a press conference afterward.
That means all the planets are aligned for it to raise rates, but Wall Street — with just 38 percent betting a hike will happen — is still flipping a coin to figure out: Will she or won’t she?
While Yellen did say she would be transparent in her decision and give the market fair warning, we are four days away from the meeting statement, and it’s as clear as mud what the federal funds rate will be this time next week.
Is Yellen’s sloppy signaling causing already volatile markets to become even more volatile — even wild and untethered at times? The answer is a resounding YES. For seven years, the Federal Reserve has forecast growth in excess of 3 percent. We have yet to achieve that. And without a strong US economy, the world cannot get growing.
And without a strong signal of leadership, the rest of the world’s central banks have no one to follow.
Like it or not, the Federal Reserve is the world’s central bank. Remember the line at the Fed’s discount window in the fall of 2007.
When things go awry, the world looks to the US for guidance. Yet the regional Fed presidents can’t even clearly signal if they would support an interest rate rise of a measly ¼ point this Thursday. Come on.
As the markets spiral out of control (up 250 in the morning, down 280 in the afternoon, and that’s on a calm day), all signs point to the Fed now being a problem for the Street.
Perhaps the Fed should get a few things straight. For one, give a signal leading up to a pivotal meeting and stay on message to be clear and cogent with markets. That’s just simple, like the NFL teams playing today: They call a signal in the huddle and everyone goes on that signal.
And perhaps Yellen could say Thursday that the Fed will immediately start selling some of its $4 trillion in Treasurys in a controlled effort to remove, say, $25 billion per month from the Fed’s bloated balance sheet. She could accompany this with an announced plan to get rates to 50 basis points on the federal funds rate within 12 months.
This would clean up the Fed’s own balance sheet without jacking up rates on credit cards and small business loans, which have to stay low for this economy to grow.
The key is far less about when the Fed raises rates than it is about giving a clear signal for the first tightening in nine years. This sends the message that someone is indeed steering the ship when it begins to make its turnaround.
It’s vital that the Fed gets its message — and its balance sheet — in order before it starts to raise rates, which the global economy is now illprepared to handle.
Communicate clearly to the markets, or do not speak at all. Otherwise, we could be in for far more drama than we bargained for.