Yellen Brings a Sigh of Economic Relief
It's been almost 20 months since Janet Yellen became chair of the U.S. Federal Reserve, long enough to start drawing conclusions about her performance. Here's the early line: She's doing a great job.
Many antagonists in Congress question the Fed's competence to promote sustainable growth. Global investors, though, are showing more confidence in the Yellen Fed than in the institution of either of her two predecessors, Ben S. Bernanke and Alan Greenspan.
A good way to measure confidence in the Fed is to look at the stability of asset prices traded on public markets. Stability, after all, is the Fed's main job. It goes hand-in-hand with business confidence, with each reinforcing the other. Volatile markets frighten investors and chief executive officers, making them defer investments. When the Fed inspires confidence, volatility tends to ease.
That's what's happening under Yellen, which should be reassuring to Congress and anyone else wondering about the health of the U.S. economy. In the $13 trillion market for U.S. government debt, the average volatility of U.S. Treasury bonds has fallen 35 percent since Yellen took the chair from Bernanke at the Fed and is 69 percent lower than it was under Greenspan, according to data compiled by Bloomberg.
Bond-Price Fluctuations Have Narrowed
Why? Economic circumstances are an important part of the answer, of course. Bernanke had to grapple with the worst financial crisis since the 1930s; it's no surprise that markets were roiled by panic and the biggest emergency economic stimulus in history. Greenspan's 19 years included many economic ups and downs. Yellen, by contrast, has had the economic winds at her back.
That said, there's more to the story than good timing. Yellen's Fed is proving to be more effective than her predecessors' at communicating to investors what comes next. That's reduced market turbulence. Investors will never forget the bond market's collapse in the spring of 2013, when the yield on the benchmark 10-year Treasury bond surged a full percentage point after Bernanke said the Fed could begin scaling back the bond-purchase program it was using to stimulate the economy. The frantic response, dubbed the Taper Tantrum, drove up mortgage rates, scalded the housing market and undermined the still-fragile recovery from the recession.
Remember the Taper Tantrum?
Even during the best of times in the 1990s, when Greenspan was widely praised for supposed monetary wizardry, volatility in the Treasury market was greater. In 1994, Greenspan's Fed suddenly tightened credit, driving the yield on the 10-year Treasury up more than two percentage points. Greenspan subsequently acknowledged that the policy was an unnecessary jolt to the economy as the presumed threat of accelerating inflation failed to materialize.
A Misplaced Inflation Bet
Yellen has continued the initiative started by Bernanke to explain the Fed's thinking to the public. That's helped keep the stock market reasonably stable. Under Yellen, the implied volatility (a measure of anticipated price swings) of the Standard & Poor's 500 Index declined to 14.3 percent, down from the average 21.53 percent during the Bernanke era and 19.61 percent under Greenspan, according to data compiled by Bloomberg. Companies in the Russell 3000 Index have been 79 percent less volatile during her tenure than during Bernanke's, and 44 percent less volatile than they were under Greenspan's Fed.
Stock-Price Swings Are Narrower, Too
Yellen keeps reminding Congress that the American economy is getting healthier, with the unemployment rate falling to a seven-year low in July. She wouldn't be immodest if she also pointed out that the level of financial stress in the money, bond and equity markets is the lowest under the current Fed than it's been in the preceding 25 years. That's shown by the Bloomberg United States Financial Condition Index, a measure of market health. This index has not only been healthiest under Yellen, but also outperformed the same metric for Europe to a greater extent than during the Federal Reserve tenures of Greenspan and Bernanke.
Businesses aren't the only ones displaying confidence. So is the American consumer. The S&P 500 consumer discretionary companies' sales per share reached the highest level since Bloomberg started compiling data in 1990. What's noteworthy is that the spending spree is occurring without any sign of incipient inflation, meaning the Fed won't have to raise interest rates significantly when it makes the decision as soon as this year.
Thank you, Janet Yellen.
(With assistance from Shin Pei)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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