Janet Yellen (Might Have) Nailed It*
by Cullen Roche, Pragmatic Capitalism
Coming into 2016 it looked like there was an increasingly high chance that the weakness in emerging markets posed a serious threat to the US economy. I repeatedly said that the Fed would be irrational to raise rates based on the following:
The risk with rate hikes is creating an extreme divergence in global policy approaches where the US Central Bank, the worldās most important central bank, is tightening policy into a global slowdown. Ā The worry is that this exacerbates problems in foreign markets by increasing capital outflows, puts further upward pressure on the dollar, dings commodities, exacerbates foreign denominated dollar debt problems, etc. Ā In the end, a sharp tightening could come back to pull the US into the global recession hole.
After one rate hike the dollar continued to rally and the financial markets got a little panicky in early January laying the table for a pause. In my view, the downturn in the financial markets was a welcome development as it unwound some of the excesses weād seen in the previous years. Ā ThenĀ when Fed emphasized that they would be cautious raising rates in the rest of 2016 the dollar reversed course:
What weāve seen since is a 60%+ rally in oil prices, stabilization in commodities and substantial rallies in the global stock markets. This bodes well for the foreseeable future, however, I will reiterate what I said back in January ā weāre not out of the woods and a few months of positive price action shouldnāt deter us. The Fed has no legitimate reason to raise rates given the asymmetric downside risk of the current environment. Ā Yellen has played this environment almost perfectly so far, however, it could all come undone with the wrong message in the coming months. Thatās a risk we shouldnāt be willing to take. I say hold the line.
*Warning ā This article involves nice things being said about Fed officials. If open-mindedness is not in your ideological repertoire you should proceed at your own risk.
