Soft Retail Data Sidelines Fed As Critics Proclaim Mission Creep

 

 

 

When the August retail sales number came in at a worse than expected -.3% (expectation of -.1%), Federal Reserve Chairwoman Janet Yellen must have sighed a little bit, knowing any chance of an interest rate hike next week should be off the table.  

Still, there are plenty of critics of our embattled Fed head, one which happens to be a mop haired Presidential contender. Another, though far more detailed and nuanced in his criticism, is highly regarded value investor and publisher Jim Grant, of Grant’s Interest Rate Observer. If I may, let me briefly summarize the skeptics’ argument. It is one of mission creep in that the Federal Reserve was not intended to have things like dual mandates, or to become data dependent when thinking about monetary policy. The Fed was set up to ensure the United States would have a stable currency.  Period. The mission has now evolved into concern about inflation, employment, non employment, foreign capital markets, foreign currencies, and even, low and behold, domestic capital markets.  

In conjunction with our Federal Reserve, foreign central bankers also are increasingly coming under more skepticism about their unprecedented actions, like quantitative easing resulting in negative yielding short term fixed income instruments. Investors, economists, and informed citizenry question the incentives and outcomes society is experiencing as the result of these actions.  

This week, the ECB decided to refrain from further easing, and many believe the Bank of Japan will also decide to do the same next week. Long term bond yields have begun to levitate higher, though only moderately so. Yesterday the 10 year Treasury closed at 1.701%. The lingering question for investors is if bond yields rise, where does the capital fleeing the bond market go? Some believe the short end of the bond market, others believe gold, and the most concerned say cash. Interestingly enough, these issues further highlight the real problem for anyone looking at a capital allocation, that being where is there value?