What U.S. Fed chair Janet Yellen doesn't know: Don Pittis
Continued risks to a U.S. and Canadian economic recovery keep us guessing about interest rates
If everyone is so confident interest rates are going to go up in the autumn, why doesn't U.S. Federal Reserve chair Janet Yellen just say they are going to go up in September? The answer is risk.
Before yesterday's monetary policy statement from the Fed, released on paper without the benefit of an explanatory news conference, there was some speculation she would make that very announcement. But that's not the way it turned out.
"The Fed effectively did this in 2004" — putting the markets on notice that a move would come soon — "shortly before it last embarked on a rate-increasing cycle," said the Financial Times in an article anticipating the central bank's latest pronouncement.
Seeking hints
But instead, the people who read each statement to glean the smallest hints about what the Fed will do next were disappointed about how little information it contained. There was a little optimism and a little pessimism but there was one sentence that summed up the gist of the 538-word release.
"The Committee continues to see the risks to the outlook for economic activity," said the statement unanimously agreed upon by Yellen and her advisors.
As Prime Minister Stephen Harper and the industry he championed discovered, risks are events that seem to come out of nowhere. The oil price plunge, followed by a general collapse in commodities prices, in a matter of months turned Canada from one of the world's hottest economies into one on the verge of recession.
In the case of the U.S. economy, there are similar events that could change what has been a relatively positive outlook.
Oil clouds the future
There are two ways oil clouds the future. So far U.S. producers have failed to heed the price indicators after crude's double dip below $50 US. Yesterday prices climbed to nearly $49 but, if production begins to take the new prices into account, jobs in the sector would shrink.
Also, Yellen's previous expectation of rising inflation counted on stable or rising oil prices. As a key ingredient in the price of just about everything, from airline flights to goods shipped across the country, oil prices at current levels could mean inflation stays low.
Another hopeful sign of U.S. economic rebirth is a stock market that has prospered despite ominous warnings of the effect of withdrawing the Fed's quantitative easing and hints of coming rate increases.
But that market optimism and the jobs it would be expected to generate could come crashing down if one or more sectors of the market turn out to be dangerously overpriced and due for correction.
It's a warning Yellen has made herself. In fact last year she made a reference to "stretched valuations" in the biotech sector. As the business website Zero Hedge pointed out yesterday, biotech shares are 88 per cent higher than when she made that remark.
Another tech bubble?
Meanwhile technology shares with little in the way of earnings or capital are reaching valuations higher than tried and true industrial concerns, leading to fears that we are seeing a replay of the 1990s tech bubble.
"Uber is valued at $50 billion, similar to FedEx, Salesforce, Caterpillar and Target; Airbnb is at $25 billion, similar to utility Pacific Gas & Electric and Netflix; and Snapchat's worth something like $15 billion, roughly equal to Whirlpool and Tyson Foods," noted Ken Mingis this week in CIO, a magazine for Information Technology executives.
Those valuations recall a time when AOL shares climbed so high the company bought Time Warner with its spare cash. The thought is so absurd now that financial journalists sometimes misremember that it was Time Warner that did the buying.
On the global economic front, seemingly endless trouble in Greece and a surprise loss of trillions of dollars in value on the Chinese stock market remind us that distant things can affect markets in North America. International Monetary Fund boss Christine Lagarde has warned of the effect of a strengthening U.S. economy on developing countries, and as emerging markets hit 15-year lows, those fears may be coming true.
As our own chief central banker Stephen Poloz once said about Canadian debt levels, finding recovery is a perilous process where many things can go wrong.
"It's like if the tree in the backyard has a crack in it," said Poloz. "You worry it's vulnerable to a storm. But if no storm happens, it goes on and on, and maybe eventually strengthens through growth. If the right storm comes along and knocks it onto your neighbour's house, you've got a problem."
Yellen has said she and her committee will continue to read the economic signs. There is every reason to think that the tree is growing its way back to health.
There are many economic indicators still to come between now and September, when many expect the Fed to first raise rates. Among the most important are two sets of employment statistics, the first landing next Friday in both Canada and the U.S.
To Canadians, while a U.S. recovery is ultimately good news, gloomy news will have its rewards. Any delay in U.S. interest rates will be a relief to the country's over-borrowed citizens.
That thought may leave Poloz, recently nicknamed Bipoloz for alternating in public presentations between optimist and pessimism, even more conflicted.
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