Enough of Yellen's whining, overprotective, mammoth Fed. Enough with the mantra of a fragile recovery, of employees who actually have a fake job, of inflation that is too low and of an economy in need of semi-permanent quantitative easing and interest rates kept at zero for eternity, each time with a different excuse .
We will be mischievous, but in the Fed's turnaround and in his new music, brilliant and gritty without being hawkish, we see Stanley Fischer, the lieutenant governor whom Obama wanted alongside Yellen (who was imposed on him by the left of the Democratic party) standing out in the background. . Seventy-one-year-old Fischer, the professor who raised half the central bankers in the West, the scholar who is not just an academic and who has proved himself excellent as governor of the Bank of Israel, is probably the only one in the directorate the Fed, to have the self-confidence to disengage from the do-good emergency molasses of the last 14 months (timed since Bernanke backtracked on tapering in September 2013) and hit the road to normalization.
Be that as it may, a market that was used to the FOMC serving surprise sprinkles and that once again expected a release in which the end of Qe was wrapped in a thousand soft and fluffy pillows, was instead served the idea that the inflation will only be low temporarily and that the labor market is much stronger than we were told. Not enough, not a word was dedicated to mourning the plight of other areas of the world, starting with ours. In short, dear markets, not only do we withdraw Qe, but we reserve the right to raise rates when the time comes. Since we are not hawks, we will give you a few more months of time (from two months to two years, Fischer said in recent days, ironically but not too much) but please get out of your head that crazy idea that we have begun to hear around, that who says that, with one excuse or another, we will never raise rates.
What could have led the Fed to this change, which is not just about language?
The first element is that the labor market is actually tighter than previously thought. The number of unemployed is rapidly declining and the number of sectors is growing in which to find qualified personnel it is necessary to start paying them more. This is not good news, neither for bonds nor for equities. In fact, it means that the residual life of the American expansion is shorter than we thought. But shorter does not mean very short. Growth may continue for a long time to come (perhaps not the ten years some have dreamed about), but real rates, at least in America, will have to stop being negative and go down to zero. With inflation expected at 2 percent in 2016 this means Fed Funds at the same level.
The second element is that the market needs to stop being even more dovish than an already ultra-expansionary Fed. While the Fed has recently hinted that mid-2015 might be the right time to start raising rates, Fed Funds futures have continued to price the hike into next year's end. Seen from the Fed this is bad. We want to be able to raise rates at any moment, the Fomc is telling us, and the last thing we need is a market that gets caught off guard and panics, as we saw happen in the summer of 2013. For which wake up, please, and get organized in time.
Enough, in short, with the theoretical courses on how to survive in the wet water of rates above zero. Enough with the hypothesis of having your first month immersed with your big toe, the second with your foot, the third up to your knees and so on, with the social worker holding your hand and the psychologist providing you with the necessary support . At some point we'll throw you in the water and that's it. By now you're grown up and you'll have to at least try to get by on your own. The third element is oil. While markets are reading the decline as a sign of weak demand, the Fed is likely seeing the big positive supply shock, which equates to a big cut in consumption taxes. Note that the drop to $80 hasn't induced anyone to cut production so far. American houses have largely confirmed their plans to expand their business. With cheap energy as far as the eye can see, there is growing room for rate normalization.
The fourth element that can explain the Fed's turnaround is that in order to really help the wretched Europe, we no longer need to play dovish to the bitter end. A plaintive Fed that keeps postponing rate hikes is holding back the strengthening of the dollar and even risks weakening it. In fact, to have a weak euro, Draghi needs a Fed that raises rates (or credibly threatens to do so) and in this way attracts capital from all over the world, Euroland in the first place.
The reaction of the markets, after the initial disappointment, was overall constructive. The dollar, which was poised to weaken, immediately strengthened. The stock market tried to go down and throw a tantrum. After all, it is a stock market spoiled by years of Qe, zero interest rates and constant verbal pampering. Subsequently, the consideration prevailed that if the Fed speaks in this way it is because it really thinks that American growth is solid.P. Reinagle. Portrait of a man with a falcon. 1750.4 Relevant as it is, the Fed's new policy is not particularly bad for financial assets. The exception is the short part of the American curve. In the coming months we will see a flatter curve and the rise in rates on the long end will be very modest. Equities have spectacularly recovered from the recent fall and are ready for a good but not sensational end of the year. From now on, the stock exchanges will have to fend for themselves more and central banks, while supporting them, will gradually distance themselves.
European stock markets will find support in the increasingly clear awareness that the euro won't be strong again for a long time.
In general, we repeat once again that the Fed, while reiterating its intention to raise rates, has not tied its hands by setting a precise date. If the economy is less strong than expected, the increase will slip. If the increase is in June, it will mean that the economy will be strong enough to absorb it.
