THE FED: “STAND BY YOUR (MARKET)”

9/5/14

Wall Street’s perennial favorite parlor game has been trying to get into the head of whoever is Fed chairman and deciding when s/he will be adjusting monetary policy one way or the other.   See, for example, TAPER TALK, THE FEDAND THE FINANCIAL MEDIA:   WHAT WOULD JESUS SAY?, 12/19/13.  The last few years, and even the last few months, have seen this game in full swing.  Yours truly may as well join the fun since he is as likely as anybody else to be right…or wrong.

It’s general consensus that the Fed won’t be raising short rates until sometime next year, probably around the middle of next year, after winding down its quantitative easing (“QE”) on the long end of the curve by the end of this year as scheduled.   Yours truly suspects, though, that the consensus might be early on the increase in short rates.  Yes, today’s jobs number indicate that the economy remains shaky and still needs the methadone of the Fed’s easy money policy.  But further contributing to my belief that we might be waiting until 2016 to see the end of what I referred as Ben Bernanke’s (and now Janet Yellen’s) War on the Elderly is the dollar’s amazing strength.  As the financial media are nearly constantly pointing out, the dollar is now trading at its year to date high against the euro.  But the greenback is also at or very near year to date highs against the British pound and the yen as well.   This economy can’t take sustained currency strength against our trading partners/financial rivals, or so the popular wisdom, which this Fed rarely defies, would have it.  Hence rates will stay low a long, long time, especially since the European Central Bank (“ECB”) seems to have jumped on the “toss the paper out of helicopters…go on, it’s good for you!” bandwagon yesterday.  

This enthusiasm for competitive debasement of currencies doesn’t look like it will end well, but old codgers like yours truly have been saying that for years now and, so far, we haven’t been right.  For now, the party continues; the hangovers are tomorrow’s problems.