Yellen helps Clinton dodge a bullet

Yellen helps Clinton dodge a bullet
Federal Reserve policymakers keep their key interest rate steady, putting the central bank on the sidelines until after Election Day.

By Ben White

09/21/16 05:23 PM EDT


Scratch one big economic worry off the list for Hillary Clinton.
Federal Reserve policymakers on Wednesday kept their key interest rate steady, avoiding a potential stock market disruption and putting the central bank on the sidelines until after Election Day.

Fed Chair Janet Yellen also strongly rejected claims lobbed at her by GOP presidential nominee Donald Trump that she is keeping rates artificially low to boost stock prices and aid Democrats.
“I can say emphatically that partisan politics plays no role in our decisions about the appropriate stance of monetary policy,” Yellen said at a news conference after the Fed announced its decision. “We do not discuss politics at our meetings and we do not take politics into account in our decisions.”
Nonetheless, the Fed’s actions can have significant political consequences.
The Federal Open Market Committee’s decision means voters are not likely to see big stock-price declines or a slowing economy before the Nov. 8 election. Clinton is counting on slowly improving views of the economy to hold off a late surge from Trump, who has made dissatisfaction with the sluggish pace of growth a centerpiece of his populist campaign. Stocks rose following the Fed’s announcement.
“The Clinton campaign should absolutely breathe a sigh of relief, because the market was just not positioned at all for a rate increase; there would have been total chaos,” said Brett Ewing, chief market strategist at First Franklin Financial Services. “Less drama is clearly good for the incumbent party.”
At her news conference, Yellen said she saw improvement in the U.S. economy but little evidence of risky inflation. And she said holding off on a hike could allow more people to come back into the labor force.
“We are generally pleased with how the U.S. economy is doing,” she said. “The economy has a little more room to run than might have been previously thought, and that’s good news. And remember that inflation continues below 2 percent.”
The move cheered investors who have driven stocks to fresh highs this year in large part fueled by the Fed’s continued easy money policy. Yellen and the Fed also offered reassuring words about the state of the economy while pointing to a possible rate hike in December.

“[T]he labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year,” the Fed said in its eagerly awaited statement Wednesday. “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”
The Fed’s decision on Wednesday is not a complete victory for the Clinton campaign.
By declining yet again to raise rates, the world’s most powerful central bank is signaling that it does not believe the U.S. economy is strong enough for even the slightest tightening of monetary policy. The Fed raised rates in December for the first time in nearly a decade. But it has been unwilling to do so again despite an unemployment rate of just 4.9 percent and warnings that inflation could spike in ways that would be difficult for the Fed to control.
The Fed’s target rate is now just 0.25 percent to 0.50 percent, a remarkably low figure this late in an economic recovery that gives the central bank little room to maneuver should a new crisis or recession arise. So the Fed’s move avoids a market meltdown but offers fresh rhetorical evidence for Trump and other Republicans who argue that the economy is extraordinarily weak.
“It’s certainly better for Clinton not to have a negative market reaction, but the story here is also that Fed does not have high confidence in continued improvement in the economy,” said Michael Obuchowski of Merlin Asset Management. “And that’s something Trump can talk about, that the economy is so weak the Fed can’t do anything even though it wants to.”
The Fed also reduced its outlook for economic growth this year to 1.8 percent from 2 percent while keeping projections for 2 percent growth over the next two years unchanged.
Trump has made bashing the Fed a central plank in his presidential campaign, repeatedly blasting Yellen as motivated by a desire to protect Democrats. “She’s obviously political and doing what Obama wants her to do,” Trump said on CNBC earlier this month. “I think she’s very political, and to a certain extent, I think she should be ashamed of herself.”
Trump has also said that as president he would replace Yellen, whose term runs until February 2018. And he has ripped the Fed for creating what he has called a “false economy” with high stock prices but only modest wage gains and a very low labor-force participation rate.
Yellen pushed back hard on the criticism on Wednesday. “The Federal Reserve is not politically compromised,” she said. “I can’t recall any meeting that I have ever attended where politics has been a matter of discussion. I think the public if they had been watching our meeting on TV today would have felt that we had a rich, deep, serious, intellectual debate about the risks and the forecasts for the economy.”
Yellen added that the central bank “struggled mightily with trying to understand each other’s points of view and come out at a balanced place and act responsibly, and that’s my commitment to the American people.”
Still, some Fed governors appear to agree with at least elements of Trump’s critique. Three members of the Fed’s policy-setting committee voted against the latest decision, the largest number in two years. These governors argued for a quarter-point increase.
Some market observers note, however, that investors have already done some of the Fed’s work by pushing up borrowing costs and generally tightening financial conditions without the Fed having to make an official policy move.
“Why does the Fed have to do anything if someone else is already doing the heavy lifting for them?” said David Kotok, chief investment officer at Cumberland Advisors. “Why break your back?”
As for 2016, Kotok said the decision should be a bit of a boost for Clinton, more because it avoids a nightmare scenario than does much to strengthen the economy.
“This at least doesn’t hurt her,” he said. “Whether it actually helps is another question.”