US Fed chief points to more normal world
25 March 2014
The confirmation by Janet Yellen that the US Federal Reserve will start to be tapering back its printing of money "in about six months" is perhaps the first confirmation that the 2007-8 financial crisis is finally being consigned to history. Most observers expect an interest rate hike in early 2015. It would represent an important turning point in the world's biggest economy. The cost of capital, the engine of capitalism, will have returned to the US.
The Guardian suggested that one of the signs of a return to normalcy is that the finance sector is not going to get its free pass, the one that comes with exceptionally easy money:
"Yellen was clear that from now on, those market pundits are going to be forced to really think about where the economy is going, using a range of numbers, including how many people are dropping out of the workforce, how easy mortgages are to get, and whether regular people find it easy to borrow.
In her comments today, Yellen showed a sensitivity to the economy as real people experience it: mortgages that are hard to get, businesses that aren’t investing, “kids shacking up with their families”, people dropping out of the labor force because they can’t find jobs.
This is a sensible view - a view of the economy with a real and human face - but Wall Street hates that. Wall Street thrives on numbers. It believes the highest and best use of the Federal Reserve’s time is coddling the financial world. The Fed is no longer coddling. It is cutting its Wall Street-centric stimulus program, called quantitative easing, and it’s ending its cheat sheet for traders.
This approach will go down hard. Peter Boockvar, a managing director with the Lindsey Group, derisively called the Fed’s changed approach “winging it”, and complained, “policy is now even more subjective”. He concluded: “not helpful”.
Yellen seems to embrace that. She appeared to refuse to be the oracle that market strategists want. “This is the committee’s forecast, and it is based on the committee’s understading of the economy at this time,” she said with finality to inquiring reporters. “And that could change over the next several years.”
It also suggests that there is a reduction in the level of anxiety in the global markets. This has played out in the gold price, as the AFR points out. Hedge funds invested in the precious metal this year with the most bullish bets in 16 months. Goldman Sachs and SocGen went the other way. After Yellen's comments, gold tumbled by the most since November. Goldman and SocGen won the bet:
"Bullion, which slid last year by the most since 1981 as some investors lost faith in the metal as a store of value, rebounded 9 per cent in 2014 as the global expansion faltered and tensions escalated in Ukraine. Those bullish influences are “transient,” and the US economy will recover from a weather- driven slowdown, pushing gold lower, Goldman’s Jeffrey Currie reiterated in a March 20 report.
“The sentiment probably had gotten a little ahead of itself,” said Ted Harper, who helps manage more than $US9 billion ($9.9 billion) at Frost Investment Advisors in Houston. “Gold is going to be somewhat problematic from an investment standpoint over the next six to 12 months. We’re probably looking to a relatively higher and quicker increase on rates, which is a headwind for precious metals.”
For DIY investors, a less fragile world is greatly to be desired. But it should be remembered that the problems that caused the GFC have not been conclusively solved. The globalised markets remain dangerous.
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