Yellen Goes Opaque

May 27, 2014

Weekly Market Outlook

By Keith Schneider

newsletter20140527Signaling a change to the fed policy of letting the markets know its intentions is quite a big tell in and of itself.

The Maestro, former Fed chairmen Allen Greenspan, was notorious for obscuring what he was thinking and came up with some great vernacular such as my favorite, “irrational exuberance.”  It was deliberate and quite effective in keeping the markets guessing as to the Feds intentions.  Its purpose was to not let the markets get ahead of itself or create bubbles and in theory allowed Fed policy to be more effective.

This policy of intentional confusion was quite effective for almost all of Greenspans’ reign which was quite long (1987-2006) and lasted during vast economic expansion. There was of course a few brush fires such as the ‘87 crash and the Long Term Capital blowup, but with enough monetary dousing through use of easy credit, those fires were squelched. The narrative was that in times of crises the Fed was there, but otherwise he kept his hands close to the vest.

Fast forward to 2008, the new Fed chairmen Ben Bernanke reversed that policy as the 2008 financial crises unfolded. Bernanke constantly reassured the markets that the Fed was there with easy money no matter how much it would need in order to get the economy back on its feet. Monetary policy would be easy for the foreseeable future.

Currently, Janet Yellen our new Fed Chairperson, has reversed that policy and it is now back to the Fed tradition of keeping the markets guessing and staying flexible as the economic winds shift.  This change alone indicates the economy is able to take off its training wheels and stand on its own, clearly a more positive read for US Equities.

With the above as a backdrop, US Equities put in a strong week with the weaker indexes regaining some key levels while the S&P 500 traded to new highs. A bit disconcerting is that volatility has dropped across almost all asset classes and to levels that is usually seen at longer term tops.

Let’s go to this week’s video.

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