Janet Yellen's 7-Year Itch
Are Fed officials getting the seven-year itch? The central bankers have kept short-term interest rates (the federal funds rate) near zero since December 2008. Back then, the economy was reeling from the financial crisis and was one year into what would become the most severe recession since the Great Depression. Slashing interest rates and purchasing bonds were strategies meant to spur lending and stimulate the economy. Fast-forward seven years and the U.S. economy finally is firming -- growth is accelerating to about 3 percent annually and job creation has picked up. The improvement has allowed the Fed to conclude its bond-buying plan and would seem to indicate that ultra-low rates are no longer necessary. But in minutes from the last Fed policy meeting, officials are struggling to agree on the timing and pace of interest-rate increases, not to mention the best way to communicate their intentions to the public.
At issue is the core problem with normalizing monetary policy: waiting too long to increase rates could lead to inflation and/or could create financial asset bubbles, while moving too quickly could snuff out the recovery. With all of the uncertainty swirling, it is great timing that Fed Chairwoman Janet Yellen will testify before Congress this week on the outlook for the economy and monetary policy.
Fed officials and the rest of the investment community were relieved to learn that the Eurozone approved a four-month extension on Greece’s €240 billion ($273 billion) bailout plan, which was set to expire on February 28th. The Greek government must submit details by Monday on the reform and budgetary measures it plans to take in order to seal the deal. There are some indications that European officials will be a bit more lenient on the terms going forward, but nothing is set in stone yet.
The extension sets up a looming summer deadline, because it will expire before a €7 billion ECB bond repayment is due. Additionally, there is the overarching concern that anything that occurs in the near-term is noise, because few believe that Greece’s debts, worth over 175 percent of GDP, will ever be repaid in full. That’s why there have been more calls for Greece to leave the euro zone -- the so-called “Grexit”.
A Grexit seems far less ominous today than it would have five years ago. But there would be losers, including euro zone countries, which own about 60 percent of Greece’s debt, the IMF, which holds about 10 percent and the ECB has 8 percent and private investors, who hold about 17 percent. And no doubt there would also be a negative market reaction. But with some time, there could be a more thoughtful way to manage the exit process and limit the systemic repercussions.
Finally, get ready for America Saves Week, an annual opportunity for organizations to promote good savings behavior and a chance for individuals to assess their own saving status. Only about half of Americans actually have a savings plan with specific goals, so clearly there’s a long way to go to get people on board with the celebration.
MARKETS: The temporary Greek deal was enough to push the Dow, the S&P 500 and the Russell 2000 to new records, while the NASDAQ inched within 1.9 percent of its all time high of 5,048 reached in March 2000.
- DJIA: 18,140, up 0.7% on week, up 1.8% YTD
- S&P 500: 2110, up 0.6% on week, up 2.5% YTD
- NASDAQ: 4,956 up 1.3% on week, up 4.6% YTD
- Russell 2000: 1231, up 2.2% on week, up 2.3% YTD
- 10-Year Treasury yield: 2.14% (from 2.02% a week ago)
- April Crude Oil: $50.34, down 4.6% on week
- April Gold: $1,204.90, down 1.8% on week
- AAA Nat'l avg for gallon of regular Gas: $2.25 (from $2.17 week ago, $3.39 a year ago)
THE WEEK AHEAD:
Mon 2/23:
8:30 Chicago Fed Nat'l Activity Index
10:00 Existing Home Sales
10:30 Dallas Fed Manufacturing Survey
Tues 2/24:
Home Depot, Hewlett-Packard, Macy's
9:00 Case Shiller Home Price Index
10:00 Consumer Confidence
10:00 Janet Yellen testifies before Senate Banking Committee
Weds 2/25:
10:00 New Home Sales
10:00 Janet Yellen testifies before House Financial Services Committee
Thurs 2/26:
8:30 CPI
8:30 Durable Goods Orders
Fri 2/27:
8:30 Q4 GDP (2nd estimate)
9:45 Chicago PMI
10:00 Consumer Sentiment
10:00 Pending Home Sales Index