Quiet Fed Puts Focus on Fiscal, Foreign Policy
With a record 76th straight month of positive Nonfarm Payroll, the Fed's choice not to do anything this month seems even wiser. With monetary policy fading into the background, investors are more focused on Pres. Trump's policy decisions and signals.
By Vikram Rangala
Friday, February 3, 2017 - 00:00
A number of influential voices have been saying that the role of the Fed, along with other major central banks like the European Central Bank and the banks of England and Japan, is waning and may diminish further in the months to come.
Central banks played an almost unprecedented role in the aftermath of the Great Recession. The Federal Reserve lowered interest rates in meeting after meeting until it arrived at virtual zero interest rates, making for nearly cost-free borrowing.
On top of that, it executed three rounds of what it called Quantitative Easing, an ongoing transfer of money into the economy, offset by a removal of weak and toxic assets from the balance sheets of banks and other corporations. The amounts measured in trillions and dwarfed the roughly $700 billion Troubled Assets Relief Program (TARP) passed by Congress during the George W. Bush Administration to avoid what some feared would be worse than the Great Depression of the 1930s.
While popular imagination focuses on what Congress did (and sometimes mistakenly believes that Pres. Obama, not Bush, created TARP), the big money was moved by the Fed. Similarly, when no European government could achieve consensus to solve the crises in Greece or Spain or the EU as a whole, the ECB was able to stave off catastrophe (arguably) by its monetary policy. The Bank of Japan, in turn, supported (or thwarted, depending on whom you ask) Abenomics reforms to help lift Japan out of its long stagnation.
The past decade will be studied as the time when Fed chairs became household names (Greenspan, Bernanke, Yellen) and monetary policy became a driving factor in crashing, saving, and regrowing the economy. With the president and Congress in gridlock, the Fed stepped up. With the European Union unable to unite, the ECB did, too.
Investors became Fed-watchers, much more than they had been. The Federal funds rate was in the news and not just bond traders, but stock and commodity traders as well, were talking about the Treasury yield curve. But with a headline-grabbing new president, a charged-up congressional majority, and a subdued Fed, all that may change.
The markets are volatile and sensitive to the latest headlines and even the current trending Twitter hashtags. While the media (and the White House) have talked about Pres. Trump's first two weeks as something close to explosive, Bloomberg's Jonathan Bernstein on Friday pointed out that Trump is actually moving at a pretty normal pace.
While some actions, like the Muslim ban and taunting of Mexico about the wall, dominate the headlines because they are dramatic and controversial, they don't really amount to actions that will affect the economy. The chilling effect of the ban may harm America's standing in the world, but it remains to be seen how that will affect US companies and workers.
Trump's executive actions are largely symbolic. Killing the Trans-Pacific Partnership trade deal wasn't a change of policy. And the orders on Dodd-Frank and Obamacare don't affect the substance of either policy, yet. His top legislative priorites, including the wall, tax cuts, infrastructure, and the replacement of Obamacare, are still either in congressional committees or in drafts on people's laptops.
His cabinet nominees are likely to be confirmed even without completing their ethics disclosures or vetting. However, over 600 key federal positions will either remain empty or be handled by Obama holdovers until Pres. Trump names people to fill them. Nevertheless, investors seem to be reacting to more political controversies, like the appointment of Exxon CEO Rex Tillerson as Secretary of State or the nomination of a Supreme Court nominee.
These issues are certainly important, but they don't necessarily affect the price of company shares, or gold, or soybeans, or crude oil.
Nevertheless, if it means that fiscal policy replaces monetary policy as what is foremost in investors' minds, that may be a good thing. Fiscal policy, broadly speaking, is everything the government does to get and spend its revenue. That spending comes from and then goes back to individual consumers, but most of it goes to companies that do the actual bridge-building and hiring and everything else. And those companies, if they are public, are owned by investors. Those investors need to be tuned into the issues that matter.
One example is a recent report also cited in Bloomberg by Barry Ritholtz, that wages in January rose 2.5 percent in January 2017, compared to January 2016. That's not huge, but it's significant. The Fed has long lamented that while jobs have been created for 76 straight months now, median wages have been little more than stagnant. That seems to be turning around now.
The wage growth is broad-based. With 19 states beginning 2017 with higher minimum wages, much of that growth is increasing the overall income of poor and working Americans. While we call them poor, they also spend almost all of their income, putting it right back into the economy to continue the growth cycle. When low-income folks do better, everyone does better.
This is an important change from the pattern before 2015, when the bulk of the economic gains went to upper income earners, including the very wealthiest, with a few dozen families having as much wealth as the lower half of the country. While some claim that the wealthiest are also the biggest job-creators, that is a myth. Jobs are mostly created by small businesses whose income comes from ordinary consumers.
If investors can focus on issues like that instead of gossip about phone calls with the Australian PM, it may be good in a larger sense. The more our markets are tied to what's actually being done to grow the economy, the more they serve as an accurate barometer of how we're doing.
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