Charles Evans, President of the Federal Reserve Bank of Chicago made headlines on Tuesday when he spoke at an Economic luncheon in Detroit. Covering all the broad array of subjects from the housing recovery to the labor market, Evens first came out firing with information about short term interest rates.
“We started to taper our asset purchases, but we indicated that the fed funds rate would be near zero for quite some time — quite likely well into 2015. Barring any changes to our outlook, this would translate into seven years in which short-term interest rates would be at their zero lower bound. But policy likely will need to remain highly accommodative for such a time to ensure we make adequate progress toward maximum employment and price stability — the two congressionally mandated goals for U.S. monetary policy”
The asset purchases he is specifically referring to is QE3, the latest in a round of bond purchases by the Fed to stimulate growth in the economy. Whether it has helped or not remains to be seen, however last summer, Ben Bernanke who was the heading the Fed hinted at stopping the program. This immediately had had an adverse effect on the markets, as the Dow went from 15,000 mark down to the low 14,000’s. In an effort to do damage control, a couple of days later Bernanke made a statement using the now famous term ‘tapering’. This word seemed to have a pacifying effect on the stock market as it began to continue its climb up to over the 16,000 point mark.
However, as the forth quarter of 2013 came around, Bernanke felt that there was enough positive data in the economy to justify the early tapering phase. Ten billion a month would be taken off the initial per month policy of 85 Billion dollar bond purchases.
Unfortunately a consequence of this action is to see interest rates rise as a logical next step. This has caused fear in the markets, because since the 08’ crash, equities and foreign direct investment have been low risk/high reward avenues to make some money off the top. As a result of the tapering and implications of rising interest rates, investors have been pulling out of equities and emerging markets.
According to a Businessweek Report. Global investors pulled $6.3 billion from developing-nation stocks in the week through Jan. 29, the biggest outflow since August 2011, according to Barclays Plc, citing data from EPFR Global. The MSCI Emerging Markets Index declined 0.8 percent to 919.48 and has fallen 8.3 percent this year.
As a result, January has been anything but good, the Dow has seen around a 1,200 point drop, with fears of contagion rippling through the markets. So it stands to reason that based on past behavior the Fed would try to make a publicized statement in order to put investors at ease. Which is perfectly understandable, however it just raises some questions of the actual credibility of the statement itself. Some questions being.
What credibility does Mr. Evans have to his word now? Did anyone see a pinky swear? No, well then if the assumption is he is saying that just so the markets can hear it, then what are the negative repercussions if the Fed does in fact have to raise interest rates before 2016?
If this trying to deflect the eventual rise of interest rates, what is the importance of rising rates in relation to the stability in the markets? Would keeping them so low have an equally detrimental effect? And finally, Why wouldn’t the newly appointed Fed chairman Janet Yellen not use this opportunity to come out and make this statement? Wouldn’t such a statement in the face of crisis assert her new position as the head of the Federal Reserve.