All about the monetary policy…
by James Frischling, President and Ron D’Vari, CEO, NewOakNewOak is an independent financial services advisory firm built for today’s global markets. Led by a team of experienced market and legal practitioners, NewOak provides a broad range of services across multiple asset classes, complex securities and structured products for banks, insurers, asset managers, law firms and regulators, including financial advisory and dispute resolution, valuation, credit and compliance, risk management, stress testing, model validation and financial technology solutions. We have analyzed or advised on more than $4.5 trillion in assets to date. Visit NewOak.
When it comes to what’s driving the markets, the Federal Reserve and its monetary policies is the topic most talked about. And whether you believe that the multiyear rally was driven by the Fed or that the future of the markets will be determined by the Fed’s policies, the debate goes on.
What isn’t open for debate is that Fed Chair Janet Yellen isn’t just worried about job growth, but real wage growth. Yellen believes it is wage growth, not the unemployment rate that represents the best gauge for the health of the labor markets and the economic recovery.
A “strong” September report in which the unemployment rate fell below 6% was initially celebrated, but the ensuing focus on low wage growth quickly tempered enthusiasm that the labor markets were getting stronger. The Census Bureau reported that the median household income showed a 1.8% improvement over last year or 0.3% improvement when adjusted for inflation.
Yellen has highlighted the low rate of wage growth as a sign that the Fed’s job isn’t done. This indicates that the Fed plans to maintain its current policies. But what if the weakness in the U.S. labor market is structural, rather than something that can be helped by the Fed. What if globalization and technology are suppressing wage growth?
The Fed’s objectives are maximum employment, stable prices and moderate long-term interest rates. It seems a continuation of the easy monetary policies would be counterproductive to these objectives.
Markets Overreacting? Maybe, Maybe Not
The world financial markets’ list of worries is long: plummeting oil prices, dimming prospects for European economic recovery, a decelerating Chinese economy, global growth uncertainties, Middle East turmoil, housing sales slowdown and Ebola pandemic fears.
These are all significant concerns, but why have they bubbled to the surface all of a sudden? While many of these risks could be mitigated individually, collectively they have become much harder to overcome. It is more likely that investors are finding an excuse to shift to the sidelines and stay out of harm’s way.
On the positive side, the prospect of the Federal Reserve maintaining a low interest-rate environment for the foreseeable future, combined with stimulating effects of lower commodity prices, would further prod the economy and improve the employment picture. These would all prove beneficial in reigniting housing sales and construction.
The developments in the U.S. and abroad undoubtedly will be watched carefully by policymakers. The Fed has signaled loudly that they will remain data-driven, and Europe and developing world markets are part of the consideration that has to be factored in.
The recent market developments, including lower commodity prices, mortgage rates and the volatility in the equity markets will outweigh immediate global concerns. A healthier U.S. economy with stronger consumer buying power should help the global economy in the pursuit of aggressive expansionary policies.