Stocks and Commodities Fell, while Dollar and Treasury Yields Rose During Yellen Press Conference

December 14, 2016

The success of a press conference is often measured by whether such elicited a positive market response. That didn’t necessarily happen today. The conference ended at 15:21 EST, a shade sooner than the usual full hour taken. Comparing market levels then to those just before the FOMC statement was released at 14:00 EST, the dollar strengthened about 1.0% against the yen and euro, while the 10-year Treasury yield advanced 7 basis points to 2.52%. The DOW and S&P respectively fell 0.8% and 0.5%. And oil and gold lost 1.8% and 1.3%.

The Fed’s tightening should be seen, according to the Chair, as a vote of confidence from FOMC members in the progress the economy continues to make toward attainment of the central bank’s mandates of 2% inflation and full employment. The latter is already in the vicinity of the goal, and the former is making quickening progress and projected to be there by 2018. More than half the questions understandably did not deal directly with the province of monetary policy but rather with changes that are coming elsewhere as a result of the recent U.S. election. Yellen declined to answer some and handled the other diplomatically. In cases, there was no answer that could have been given that did not at least highlight the political tensions in the country. With such awkwardness, the market movements make sense.

A combination of looser fiscal policy and less accommodative monetary policy as practices for example in the early 1980s has historically buoyed the dollar and depressed gold, while lifting real interest rates. Undoing measures adopted since the Great Recession to diminish the likelihood of financial market disasters in the future may certainly lift growth but also will reasonably also elevate the chances of another meltdown.

For the time remaining before the Trump people take power and then implement change, the focus on a new administration will be much more influential on financial markets than what the Fed is doing. Barring other developments, it seems therefore that today’s stock sell-off is unlikely to mark a change in direction. The Trump team is driving the bus. Stocks could rise to new highs. Long-term rates probably have further to climb, and the dollar probably will keep rising until incoming officials protest appreciation. And such a point too is likely to happen eventually.

Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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