Is Yellen on the way out?

Jul 28, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

From news on tax reform to the failure of an Obamacare repeal, this week was full of consequential news.  Add to that, the busiest week for earnings announcements this quarter and you have the makings of a very crazy week.  I’m happy to say the markets look to close higher despite the wide variety of good and bad news.  I use the word “bad” loosely because it is such a subjective word.  At the moment, investors have a high tolerance for political uncertainty and appear optimistic for the second half of this year.

Let’s start with the Federal Reserve Open Market Committee (FOMC) meeting this week.  To nobody’s surprise, the Fed announced it is holding pat on interest rates.  The difference between the last meeting and the current meeting boils down to about fifteen words.  The Fed’s statement makes clear job gains in June were solid but that inflation is below its two percent target.  The language on both items is stronger than the previous statement.  With regards to its balance sheet it went on to say, “for the time being the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee currently expects to begin implementing its balance sheet normalization program relatively soon.”  It was the relatively soon part that got people’s attention.  It is unclear whether the Fed will let its holdings mature, actively sell its holdings on the open market, or some combination of the two.  As a reminder, the Fed’s balance sheet swelled from roughly $800 million before the financial crisis in 2008 to roughly $4.5 trillion today.

While we’re on the subject of the Federal Reserve, it should be noted that Janet Yellen’s term as the Chairperson is set to expire in January 2018.  It is up to the president to decide whether to keep or to replace her with a new appointee.  The Fed has been slowly transitioning from a more accommodative to a less accommodative policy regarding the economy, which may work against the current administration’s desire to keep its monetary foot on the gas pedal.  The latest reports suggest that Gary Cohn is the leading contender to replace Janet Yellen.  If appointed, Cohn would be the first Fed Chairman who isn’t a trained economist since Jimmy Carter’s appointment of G. William Miller.  Mr. Miller lasted all of seventeen months before being replaced by Paul Volker in August 1979 due to runaway inflation.  Some of you may remember those days.

In other news, a new study out this week suggests the mortgage interest tax deduction has no effect on home ownership.  I should admit I am skeptical of these findings but believe it will be used in the upcoming tax reform debate.  As reported by the Wall Street Journal, it shows the popular U.S. tax deduction, a “sacred cow” of the country’s tax code, just isn’t very effective.  The study was put together by scholars from MIT, Princeton, and the University of Copenhagen.  Ironically, the study centers on real estate data from Denmark in the ‘80s.  It concludes the deduction reduces government tax collections by $72 billion per year.  This report comes during speculation over the final shape of the administration’s tax cut proposal.  Without savings from the attempted Obamacare repeal, the GOP will have to come up with other ways to cut expenses in order to keep their proposed tax reform deficit neutral.  Another idea being floated is to increase the top marginal tax rate to 44% on those earning above $5 million.  It seems implausible that Republicans will go for that option.

In closing, I turn to speeding tickets.  At some point, virtually everyone will be pulled over for exceeding the speed limit.  Urban legend suggests that the color of the car is a major determinant.  Most people believe the color red gets pulled over more often, but red actually comes in second to white.  So when I came across a non-scientific piece this week that asked which vehicles get the most traffic tickets I was intrigued.  Is it BMWs or perhaps Corvettes?  I figured a sports car would top the list.  I was wrong.  Top of the list is the Lexus ES 300.  To be fair, the remainder of the top ten was, in fact, sports cars.  But Lexus?  To read the results and see where your car ranks check out this website (not an endorsement of insurance.com).  Now you know.

July 28, 2017

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