(Since we had our turn to grill Ms. Yellen in this report, we had to thank her for the great field trip to the Fed we showed you pictures of earlier in the week.)
If you want to elicit a certain response, you have to know how to ask a question correctly. Republican Ed Royce June 22, knew that art. He asked Janet Yellen if the Fed sees it as a "3rd pillar"[mandate] to target stock price levels. Yellen smiled and said, "no, we do not target the level of stock prices."
This one is easy.
Is it a 3rd Pillar?
No, but it is extremely important. The Fed's mandates are steady inflation and full employment.
Here's what the Fed's website states:
"The Congress established the statutory objectives for monetary policy--maximum employment, stable prices, and moderate long-term interest rates--in the Federal Reserve Act. The Federal Open Market Committee is firmly committed to fulfilling this statutory mandate."
Do They Target A Level?
Of course not. Ms. Yellen the S&P 500 ETF (NYSEARCA:SPY) closed at 208.03 today. Should we be in there in the aftermarket to make sure it prints 207.99?
Mandates, Pillars and Reality Are Different Things
These are the mandates (inflation and jobs) set out by congress which the Fed follows. If the congress had issued a new mandate the Fed would follow it. Thus, such a question from a member of congress, we dare say was loaded, or worse a set up.
If he really wanted a "no" he might as well have gone all the way and asked, "Ms. Yellen are you breaking the law by going beyond the congressional mandate to the Fed?"
Congressperson Elazar you have the floor.
"Thank you Mr. Chairperson. Ms. Yellen, great to see you and thank you for your hard work. Oh, and thanks a lot for the field trip you took me and the kids on, that was fun (see here). As a follow up to Mr. Royce we would like to better understand the Fed's view of how important stock market prices are."
"Would it be fair that the stock market is important to overall monetary policy?" (More like, are there times when you find your self staring at the screen all day like the rest of us?)
"Is it fair that you know and/or watch the general levels of the market daily?"
"Would it be fair you care very much about general levels of the stock market although of course it's not a mandate or a 3rd pillar nor are there specific target levels?"
"We see from your minutes that you specifically cite satisfaction many times that your commentary sent the market back up off of their Q1 lows. Is it fair that such communication was something planned to benefit the economy by helping ensure market stability?"(See how the Fed credited their commentary for the Q1 bounce.)
"Mr. Elazar your time has expired."
"OK, so it's not a pillar, it's not a mandate but it's fair to say it's important, and if not, incredibly important?"
I ask you, do you think we might get a yes or two from those questions, not like Mr. Royce?
Stock market pillar question tells you the market is incredibly important to the Fed
Actually from that question, we actually learned how incredibly IMPORTANT the market is to the Fed. The only question that could be asked to elicit an emphatic "no" was to ask the Fed to admit if they are breaking the law beyond their mandate.
The tag-team did a great job in tricking many, but not everybody.
Fed Is Stuck
It's another friendly reminder that the Fed is stuck (as you already know). They know that the raising of rates from near zero to anything is a shock to the system like it was in Q1. We are in uncharted territory.
Reducing their self proclaimed unnecessary reserve levels would also shock the system. The Fed and congress know where we all stand.
They are not lowering rates because 1) Yellen said, we are already at the zero "lower band." and 2) She also said on June 22nd she is "hopeful" for growth. (Although on June 21st she told us not to listen to these types of forecasts (read here for proof)).
As inflation continues to rise and the labor market remains tight (yes tight) inflation will be another drag on an already slowing economy. It looks to us like the Fed will do nothing about it for some time.
We feel firm that the Fed had a strong question planted. It glared to us to say how important the stock market issue really is to the Fed.
They are stuck and can not raise rates because they know they will hit the markets. Maybe they feel they can find an excuse after the elections, so they wait. In the meantime, CPI, PCE, import prices, wages, oil, are all strong and moving currently higher.
Good luck and please be in touch. All of your comments teach US a ton.
Elazar Advisors, LLC specializes in earnings and predicts, analyzes and reacts to earnings and earnings events as well as developing current company and macro stories with a hedge fund perspective.
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