Today is a day when economics is lamentably largely absent.
There is the buildup to Fed Chair Yellen’s testimony to Congress tomorrow, but in the meantime politics is seeping into the market media.
However, financial markets have become quite adept at ignoring politics as investors rightly assume that politicians will have very little direct impact in the near term.
The driving forces for any economy in the near term are:
- Do I have a job?
- Can I afford to buy what I want to buy?
Meanwhile, San Francisco Fed President John Williams, Fed Chair Janet Yellen’s right-hand man told the Australians today that another Fed rate hike and starting passive quantitative policy tightening this year is sensible.
In other words, the consensus economic opinion is sensible. So, the idea that economists are sensible should not occasion any surprise to anyone.
Maybe it could be helpful for investors who are somewhat concerned if the markets at present levels are vulnerable to a surprising shock, to recall that it’s now about two weeks ago that Mr. Williams stated: “The stock market seems to be running pretty much on fumes” while adding that he was somewhat concerned about the complacency in the market.
At that moment in time, Mr. Williams was not the only Fed representative that signaled relative high share price valuations.
Fed Chair Yellen for example, when asked about share price valuations at a question-and-answer event in London, UK, said: “By standard metrics, some asset valuations look high but there’s no certainty about that.”
By the way, it was at that event that Ms. Yellen also said that she did not believe that there will be another financial crisis for at least as long as she lives, thanks largely to reforms of the banking system since the 2007-09 crash.
Along Ms. Yellen and Mr. Williams, also Vice Fed Chair Stanley Fisher mentioned in a prepared speech before an IMF workshop the high valuations in the markets: “The increase in prices of risky assets in most asset markets over the past six months points to a notable uptick in risk appetites.”
Now, does this all mean that we are relative close to a sizable, but also, and why not, healthy correction from the actual high levels of risky assets remains an open question.
What is certain, at least in my opinion, there is more room for a surge to the downside than to the upside in the near future and once that correction takes place or will be underway, because there is no doubt that it will take place, the big question will then become, when will it be a good time to get back in.
The rationale for this is that real high interest rates are not in the cards for quite some time to come and if things remain more or less like that, that’s supportive for equity markets.
Also, never forget, buying with cash available is still the safest way for long-term investing.
Besides all that, President Trump has made the nomination of Randal Quarles, who was a senior Treasury official in the Bush administration, for the Federal Reserve Deputy Chair with responsibility for financial regulation.
The regulatory side will doubtless occupy political attention.
The Wall Street Journal comments that Mr. Randal Quarles, of course if confirmed, will weigh in on monetary policy as one of seven members of the Fed’s board of governors, now short-staffed with only four members. His views in that sphere could put him at odds with his new colleagues, notably because he has criticized the Fed’s policy of keeping interest rates near zero for years following the financial crisis, and advocated for a monetary-policy rule, or formula, to guide rate decisions.
For economists, Quarles’ nomination is somewhat concerning as he is known for his rules-based approach to central bank policy.
Most economists would argue that a rule-based approach to central bank policy at a time of considerable structural change is not such a good idea, for not saying a “bad idea.”
The overall question is as to whether good sense will prevail at the Fed in the future.