Yellen reminds markets the Fed is in charge
By Kirsten Hastings
Janet Yellen’s Economic Club of New York speech provided a timely reminder that nobody can move markets like central bankers.
The timing of the speech, its content and most importantly the market reaction to it, meant an interesting contrast with Yellen’s peers at other major central banks was provided.
European Central Bank president Mario Draghi has increasingly looked like he is banging his head against a brick wall as he tries to prompt a healthy level of inflation and economic growth across the eurozone.
As investors lose faith in his power to manoeuvre the economy in the chosen direction, they also become less inclined to respond to his words by moving their own money around.
Draghi has long since been seen to have thrown the kitchen sink at generating eurozone growth and has moved onto the few remaining fixtures and fittings in his increasingly derelict house.
In bumping up the quantitative easing package and trimming interest rates once again this month Draghi convinced few people that he has the power to do ‘whatever it takes’ still.
Investors appear to be surmising that if the kitchen sink has not done the trick then neither will anything else he can rip out and throw at the problem.
They righty ask, if consumers and businesses are not responding to the central bank’s rhetoric and measures, then why should they respond by making investment decisions?
Then there is Japan. Prime minister Shinzō Abe in lockstep with Bank of Japan governor Haruhiko Kuroda has fired arrows rather than launching the kitchen sink but the principle holds true.
Japan’s economy continues to flatline despite a series of interest cuts and vast amounts of QE.
If the economy is not responding to the central bank policy then over the medium term why should equities prices, beyond short term fluctuations in the hours following an announcement.
Yellen on the other hand still has investors hanging on her every word and responding enthusiastically to what she says. The market rally after the New York speech has already entered a second day.
The speech, which triggered a near universal rise in equities markets around the world on Tuesday evening and Wednesday morning, was not even an official Federal Reserve event.
It was a well-established and highly regarded event that Yellen spoke at, but it was not one of the FOMC meetings which have the official role of setting monetary policy and providing guidance on its future direction.
The detail of what Yellen said was also much less precise than the sort of things Draghi and Kuroda have said recently. She simply implied that the next 25 basis point rise may be a little further off than many had anticipated.
The ECB and Bank of Japan chiefs on the other hand have been in the practice of announcing tens of billions in new QE when they get to their feet to deliver speeches.
For anybody questioning the power of central bankers in light of recent events the Federal Reserve chair and the reaction to her words shows that not all central bankers are equal. It is not necessarily what is being said that matters most to investors, but who is saying it.Category: Commentary