Financial Market News – July 18, 2017

In the typical double speak of Washington politicos, Federal Reserve Chairwoman Janet Yellen signaled both good news on the economic pathways – but then added retractions to balance it back down. Sort of like a doctor saying they think you will recover but you may not either. Her comments met most analyst expectations, although the content of her message didn’t offer much specificity.

While touting as positives, she talked victories in job gains, lower unemployment and a strong housing market. But she expressed concerns about possible inflationary pressures on spending. She also indicated that the Fed will raise the bench mark interest rate sometime this year but gave no hint of when or how much. Or even if it would be put off until next year if the conditions remain favorable.

Other highlights of Yellen’s testimony included reports of increased consumer spending and business investment, which have helped reinforce the country’s manufacturing production and exports.

Also on the minds of many is the $4.5 Trillion dollars worth of debt the Fed is holding that was bought to infuse money into the economy to keep it afloat during the recent recession. These are mostly Treasuries Bonds and mortgage backed securities. At some point, the Federal Reserve will need to start reducing these from it’s balance sheet. Depending on WHEN, HOW and HOW FAST this is done can push the economy back into a tail spin. Or hinder continued growth. For example – if the Fed starts selling off the mortgage backed securities – investors that pick them up will not be buying new mortgage back securities. Banks don’t make money holding loans – but by making them. Then they sell off the loan to bring in more cash to loan to new customers. If the investors in such mortgage backed products are buying up the Fed’s holdings – they are not going to have cash to buy the new ones. A wait and see position is being taken by many.