Wednesday, December 17, 2014

Coach Yellen Decides To Punt

Some coaches are gamblers. When faced with 4th-and-short, they inevitably give in to the crowd’s chants to “Go for it!” Coach Yellen is not one of those gamblers. 

In recent months, there has been a great deal of stress introduced into the global economy. While lower oil prices are a boon for many, they cause great harm to some. The losing economies (ehem, Russia) have introduced a new risk to tepid global growth, and any shocks have the ability to do far greater harm than anticipated. Contagion has been something that investors have become accustomed to ever since Long-Term Capital Management introduced leveraged risks into the stock market. Cyprus, a tiny nation with an outsized banking industry, nearly derailed the global economy a few years back. Russia has a far larger role in the global economy, with the 8th largest GDP of $2.1 Trillion. Today’s dovish Fed statement may also be an attempt at reducing global instability. We have felt that lower interest rates were inevitable, even before the drop in oil prices. Considerable labor market slack and muted wage growth are a recipe for low inflation, an environment where a rate increase is not justified. With the dramatic drop in oil prices since Thanksgiving, today’s Fed is faced with even less impetus to raise rates.

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