By Byron Carson, Portfolio Manager, Principal Global Fixed Income
Federal Reserve (Fed) Chairwoman Janet Yellen is in a tough spot. Markets are pounding the drums with a gloomy message of economic catastrophe on what seems like a daily basis. "Risk off," the markets say; still the U.S. economy-driven by domestic demand-continues on in the face of higher U.S. dollar, falling oil prices, and the incessant beating of the financial market drum. In the midst of recent daily market volatility, Chairwoman Yellen addressed Congress with her semi-annual monetary policy report. As investors reflect on Chairwoman Yellen's rhetoric, they may wonder: "Are the markets telling us that the U.S. economy is entering a recession even though the labor market growing and wages are on the upswing?" In Chairwoman Yellen's own words:
"Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar. These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices provide some offset. Still, ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending and global economic growth should pick up over time, supported by highly accommodative monetary policies abroad."
The Chairwoman certainly acknowledges the tighter financial conditions driven by market conditions with the nod to lower equity prices, wider credit spreads, and a January rise in the U.S. dollar. In addition she acknowledges that this market turmoil could change the economic and labor market outlook. Then finally she says that lower, longer-term, interest rates and oil prices are positives, offsetting some of this market gloom.
Still, I think there is more meaning to what Chairwoman Yellen is saying. She is, in a polite, yet forceful way, pushing back on recent market turmoil to focus on economic outcomes. Labor markets have continued growing with non-farm payrolls averaging 231,000 jobs added per month over the last three months, ahead of the 222,000 jobs created over the past twelve months. Importantly, wages have accelerated over the past year with a 2.5% year-over-year (YoY) reading in January versus 1.7% YoY at the end of 2014 as the unemployment rate fell to 4.9%. This is classic macroeconomic theory in action; unemployment rate falling, labor markets tightening, and with a lag wages rising. Indeed, this is the important message Yellen is delivering.
For a more profound purpose than a market versus economy discussion, American author, poet, and civil rights activist, Maya Angelou, penned the poem, "Still I Rise," in response to oppression. Nevertheless, there are corollaries as Ms. Angelou writes:
"You may write me down in history
With your bitter, twisted lies,
You may trod me in the very dirt
But still, like dust, I'll rise."
Markets believe they drive the Fed. Markets believe they drive the economy. Yet, the U.S. economy has defied the recent market volatility. Chairwoman Yellen in her acknowledgment of market volatility helps keep market participants at bay, while focusing on her important task of watching the economy and balancing near-term market volatility with longer-term economic outcomes.
Ms. Angelou goes on to write:
"You may shoot me with your words,
You may cut me with your eyes,
You may kill me with your hatefulness,
But still, like air, I'll rise."
Hopefully someday, maybe soon, the markets will come to realize the U.S. economy, like air, will rise!