Much has been made of the rising tide of volatility consuming financial markets. One needs look no further than oil prices to witness the sheer scale of intraday momentum swings to understand the precariousness of the outlook. So much policy has become dependent on the condition of financial markets that the real economy continues to take a backseat to the financial economy. One of several problems associated with this type of policy strategy is that it fails to account for the fundamental developments and considerations that should be driving monetary policy decisions. For instance, take China last week, which engaged multiple policy tactics to stem a slide in financial markets when the real concern should be tackling debt problems and finding new avenues for growth now that the global export economy is drying up. For the Federal Reserve, the merits of its self-styled “data dependence” motto is up for debate for similar reasons. It appears that the Fed is more concerned about the level of equity benchmarks at the expense of core mandates including maximum employment and 2% inflation targeting. With Janet Yellen regularly warning on the “stretched valuations” of equity markets, it feels more like the tail continues to wag the dog than the other way around.
Today’s ADP nonfarm employment number proved largely a nonevent as market participants cue up for Friday’s all-important BLS nonfarm payroll figure. Expectations for NFP before the ADP announcement saw a consensus range from 173,000 on the low end to 257,000 on the upside with the consensus estimate at 223,000. The just-released private payrolls figure seems to imply the whisper number will be revised lower even though estimates show that the unemployment rate is forecast to drop to 5.20%. While Stanley Fischer’s comments over the weekend led many participants to believe that the second in command at the Federal Reserve has a more hawkish bent, especially after the comments on inflation, the reality is that the labor market has not recovered as much as the unemployment rate conveys. Structural unemployment remains a critical problem with labor force participation ebbing near multi-decade lows. The problem with tracking the financial economy and not the real economy is that the Federal Reserve has lost sight of the real drivers of growth. Money creation and debt are not the two best catalysts for growth as the empirical evidence shows. While raising rates might cool speculation, it is imperative to make a decision and stick with it or risk upsetting the delicate financial ecosystem so markets can adjust without dictating policy.