With stocks sucking wind in the past week, the stage was set for Federal Reserve Chair Janet Yellen to save the market just days before Christmas -- at least until year-end.
In short, she did not disappoint, delivering a masterful Fed communique and press conference. The statement, in fact, may have been the most impressive in Fed history given the gravity of the situation.
Not only did the Fed throw some support behind the economy's improvement (important to do in light of market's rally in response to the November jobs report), but in using the word "gradual" twice in the statement as it pertains to the pace of future rate hikes it suggests 50-basis-point increases at each meeting in 2016 are unlikely. Yellen later backed that notion up with her comments.
I know the mere thought of 50-basis-point rate hikes seems absurd given the U.S. economy's sluggish growth backdrop and industrial recession that is being fueled by the dollar's strength and commodities plunge, and in turn pressuring results for companies such as Deere (DE) and 3M (MMM). But the crash in junk bonds (which Yellen said she is "monitoring") and in emerging market stocks in recent weeks, in my view, has investors preparing for a more hawkish Fed next year than what we have been used to during the recovery.
So far, that thesis -- the Fed would stomp out the recovery with quick, consistent rate hikes in 2016 -- has not gained support in the aftermath of the Fed's move, with equities surging in response to the overload of financial news.
When asked via email by TheStreet if the first rate hike would trigger a recession in 2016, legendary investor and CEO of Omega Advisors Leon Cooperman flatly said, "no."
Here is what you have to like from the FOMC statement and Yellen's final presser of 2016.
"A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year."
Remember, it's good to see people getting back to work -- that's how sustainable economic growth is driven, not by QE and silly low interest rates.
"The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen."
I like seeing the Fed suggesting the economy has arrived at a point where gradual rate hikes can be digested by companies and markets.
"The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation."
It was important for the Fed to reiterate to businesses that interest rate policy is still friendly.
"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate."
Most important, the Fed reiterated that future rate decisions will be data dependent.
Janet Yellen Press Conference
- Yellen has re-opened the view that rate hikes have a lagged impact on the economy. This is something I written about since 2005. The lag time is often cited as being 9-12 months. The sense coming off the press conference was that Yellen & Co. are going to sit back and see how the first rate hike affects sales of cars, housing, etc. If things don't fall off the map, maybe the economy could handle another rate hike...by the summer of 2016. The stock marked liked hearing that for sure.
- Yellen explained precisely what "gradual" means -- rate hikes will not be linear and heck, there may only be one of them in 2016. The market really liked hearing that one.
- Yellen restores some confidence that the Fed knows what it is doing.
- Yellen not so precisely said the first rate increase could be reversed if growth becomes subpar.
All in all, Yellen is already setting herself up for Time Magazine Person of 2016.