Janet Yellen

"When central bankers start talking like FX strategists, it can signal something important"...

So who is the most powerful woman in the world now?

Last week was the watershed for central banking and for the illusion that the current disposition of things has a future. 

The game is over. The trend has changed. And the Fed knows it. The question is: What will it do about it? Roll-over or fight? But will it matter much if it fights? Janet Yellen clearly lost the crowd this week as “accommodative” was met with a resounding SELL as confidence has been shaken. Her job is now to win back confidence. Whether she can or not is now largely determined how the binary set-up we face here plays out. Bottom line: Bulls need a 1998 like repeat to save this year. How did the Fed manage the big correction in the Fall of 1998: It cut rates of course...Well, good luck with that this year.

Every dictator knows that a continuous state of emergency is the best means to justify tyrannical policies. The trick is to keep the fictitious emergency from breeding so much paranoia that routine activities come to a halt. Many have discovered that its best to make the threat external, intangible and ultimately, unverifiable. In Orwell's 1984 the preferred mantra was "We've always been at war with Eurasia," even though everyone knew it wasn't true. In its rate decision this week the Federal Reserve, adopted a similar approach and conjured up an external threat to maintain a policy that is becoming increasingly absurd.

For those of you who don’t want to take the time reading through the ponderous 7000-word transcript of yesterday’s FOMC press conference, we bring you the shorter Janet Yellen, translated from Fedspeak into plain English. Enjoy!

What the Fed really decided Thursday was to ride the zero-bound right smack into the next recession. When that calamity happens not too many months from now, the 28-year experiment in monetary central planning inaugurated by a desperate Alan Greenspan after Black Monday in October 1987 will come to an abrupt and merciful halt. Yellen and Co should be so lucky as to only face torches and pitch forks.

"Instead of acting via bond markets and banking sector, why shouldn’t public sector bypass markets altogether and inject stimulus directly into the ‘blood stream’?... CBs directly monetizing Government spending and funding projects would do the same. Whilst ultimately it would lead to stagflation (UK, 70s) or deflation (China, today), it could provide strong initial boost to generate impression of recovery and sustainable business cycle... What is probability of the above policy shift? Low over next six months; very high over the longer term."

On Thursday, the Fed made it clear that its reaction function has changed. "Data dependency" is gone (or at least relegated to the backburner in times of global turmoil), and international and financial market developments are now officially guiding the FOMC's (tentative) hand. This epochal shift has left market participants asking one very simple question: "Ok, now what?" 

The current surge in deflationary pressures is not just due to the recent fall in oil prices, but rather a global epidemic of slowing economic growth. While Janet Yellen addressed this "disinflationary" wave during her post-meeting press conference, the Fed still maintains the illusion of confidence that economic growth will return shortly. Unfortunately, this has been the Fed's "Unicorn" since 2011 as annual hopes of economic recovery have failed to materialize.

The Fed remains in a box of its own making. We are beginning to doubt whether central bank will ever be hike rates again voluntarily. What is however eventually highly likely to happen is that the markets will force the Fed to act – or as Bill Fleckenstein puts it, “the bond market may take the printing press away from them”.

We advise investors to fade out the short term noise emanating from the Fed today and from Janet Yellen and focus on the reality

The simple fact that the Fed is struggling to increase interest rates from near 0% after seven long years should give pause for concern. It underlines the vulnerability of the U.S. economy and means that another recession is very likely. Indeed, the huge levels of debt at all levels of U.S. society and the significant increase in global debt levels during the last seven years mean that another recession is almost certain.

Whether Janet Yellen admits it or not, you can bet that going into today’s most important Fed meeting ever (until the next one) the supposedly “data dependent” FOMC has taken a good hard look at what’s happening in China in the wake of Beijing’s not-so-smooth transition to a new currency regime. A fresh look at the data suggests outflows from July through mid-Septemeber total more than $300 billion.