By Pam Martens and Russ Martens: April 7, 2015
William Dudley, President of the New York Fed
Thanks to the Federal Reserve feeding its habit for six years, the U.S. stock market now reacts like a junkie who needs a constant fix from the reassurance of zero, or extremely low, interest rates.
William (Bill) Dudley, the President of the New York Fed, was peculiarly on hand yesterday morning to feed the addiction with a speech to members of the Business Partners Roundtable at the New Jersey Performing Arts Center in Newark, New Jersey.
Anytime a President of a regional Fed Bank makes a public statement on the timing of interest rate hikes or the pace of economic activity that influences that timing, it is well established that it moves stock, bond and currency markets. But yesterday was not just any routine day – it was a particularly odd day for any Fed President to speak before the stock market opened, especially one from the New York Fed which oversees open market operations with the primary dealers on Wall Street.
Yesterday’s market would have been expected to sell off dramatically at the open as a result of a stunningly bad nonfarm payrolls report last Friday. The Labor Department reported on Friday that employers had added a tepid 126,000 jobs in March, the slowest pace in over a year and buttressing a steady stream of other weak economic reports over the past two weeks. Because the stock market was closed last Friday in observation of Good Friday, Monday’s stock market open was going to represent three days of pent up selling pressure according to stock futures trading deeply in the red on Friday.
Initially, the stock market did sell off abruptly Monday morning with the Dow Jones Industrial Average down 116 points. Then the market abruptly retraced all of its losses, moved into positive territory, soared by more than 100 points and closed up 117 points on the day. Business media is crediting Dudley’s speech with that move.
The Federal Reserve takes meticulous note of economic data release dates. Nonfarm payrolls is one of the most important data releases. The Fed knew the number was coming out on a day when the stock market would be closed and it knew that any Fed President speaking about that number prior to the market opening on Monday morning would move the market. The fact that Dudley clearly released his speech to the media before the markets opened raises even more suspicions as to whether the Fed is improperly meddling in the markets.
The U.S. stock market opens at 9:30 a.m. Eastern Time. The Los Angeles Times’ Jim Puzzanghera reported from Washington, D.C. on Dudley’s dovish speech at 7:35 a.m. yesterday morning.
At 8:30 a.m., Bloomberg News printed a detailed article under the headline, “Dudley Says Pace of Rate Increases Is Likely to be ‘Shallow’.”
The initial selloff in the market before the quick rebound might have been influenced by a graph shown on CNBC which accentuated a list of oil and Dollar negatives mentioned by Dudley in his speech. The CNBC report aired at 8:24 a.m. and Steve Liesman reported that Dudley was in the process of delivering his speech at that early hour – that is, a full hour before the stock market would open.
The negative impacts depicted by the CNBC graph from the Dudley speech were:
Dollar rise likely to lead to weak trade;
Dollar strength ‘significant shock’ to economy;
Oil decline to lead to further drop in energy investment;
Sharp decline in oil exploration will create ‘meaningful drag’ on economy.
CNBC Runs This Graphic at 8:24 A.M. About William Dudley’s Speech on April 6, 2015
Those are very real and very significant headwinds for an economy that can’t break out of a 2 percent growth range after six years of a zero Fed Funds rate and trillions in quantitative easing support from the Fed. But the stock market shook that off quickly, choosing to focus on the continued fix from zero interest rates.
The stock market loves low rates because it makes the dividend yield on stocks more competitive to investors than the 1 or 2 percent being paid on fixed income instruments like Certificates of Deposit or Treasury notes.
Any regional Fed President could have delivered these remarks – and could have delivered them after the market closed at 4:00 p.m. – thus eliminating the feeling that the Fed is now overtly meddling in the stock market. Dudley is already seen as too cozy with Wall Street. In November, he was hauled before the Senate Subcommittee on Financial Institutions and Consumer Protection and grilled on accusations of lax regulation of Wall Street and multiple failures to function as a cop on the beat.
In his speech yesterday, Dudley alluded to a growing chorus in Congress demanding changes in how the Fed operates. Dudley stated:
“With regard to the structure of the Federal Reserve System and the role of the regional banks, including the New York Fed, I also agree with Chair Yellen that the system is working well, and I do not see a need for any substantive changes. I believe that the System has been designed appropriately so that a wide range of regional views are represented. At the same time, I believe that the Federal Reserve System’s monetary policy responsibilities are allocated appropriately by the Federal Open Market Committee, with New York playing an important role to ensure that monetary policy is executed effectively even during periods of duress. Of course, the Federal Reserve System and the New York Fed are not perfect institutions. That is why we always must strive, in an open and transparent manner, to improve what we do and how we do it, for the benefit of the American people.”
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