Investors got a chance to see and hear incoming Fed Chairwoman Janice Yellen this week when she testified in front Congress for the first time. The stock market apparently took Chairwoman Yellen’s testimony as an excuse to stall the current down trend and rally a bit.
What did the new Fed chair say to get investors excited? Well, nothing new really. I think anyone who watches Fed policy had an understanding the leadership change from Ben Bernanke to Chairwoman Yellen would not lead to any dramatic policy changes regarding the current course of the Fed’s quantitative easing bond buying program or its suppression of short term interest rates.
This is pretty much the message delivered. After the hearing the testimony, it seems reasonable to assume barring any major economic or geopolitical disruptions the Fed intends to continue reducing its pace of its bond buying stimulus (QE) program. After listening to the testimony, I continue to believe short-term interest rates will likely remain extremely low through 2015 and then only rise slightly and slowly for some time after. Nothing surprising here.
Perhaps however, investors’ embrace of the new Chairwoman has less to do with anticipated policy and more to do with a sublime understanding of what Yellon represents.
A contingent of high profile economists and professional investors share a school of thought, believing the 2008 financial crisis should have, and would have, resulted in a prolonged economic depression on par with U.S. economy during the 1930s. This school of thought also believes the primary reason the world economy did not enter a depression is the aggressive and unconventional monetary counter measures effected by the Federal Reserve. These counter measures took a variety of forms, the most high profile being the Quantitative Easing programs that continue even now five years later.
A review of interviews of various Fed members indicates among those sharing this school of thought is a contingent inside the Federal Reserve itself. This contingent of Fed economists and Board members believes the Fed acted as the “adult in the room” during a time of chaos, and as a result they are emboldened to continue to manage the central bank in a more activist fashion, attempting to use Fed policy to target very specific economic goals.
Chairwoman Yellen represents this contingent. The result of her leadership is likely to be continued accommodative interest rates and targeted monetary expansion, both of which favor stocks as an asset class.
So what do I think? Truth is I’m not sure. I’m an investor, so I don’t argue with results. Something worked to support the markets in 2009 and a depression was averted. But the economy is a continuum, not an event, so as long as some of these aggressive policies stay in place it’s difficult to discern their true end result. For now, however, the grand experiment continues, let’s just hope it doesn’t blow up the lab.