Fed Chair Janet Yellen's testimony to the two houses of Congress comes at, shall we say, an interesting time. Commodity prices, especially energy prices, have been in free fall for months; now equity prices seem to be following suit; and there are growing fears about the solidity of the Eurozone banking system, with Deutsche Bank squarely in the bears' sights. And all this is happening at a time when all of the major central banks, the Fed included, have fired off just about every shot in their locker just to keep things from getting completely out of hand.
In the circumstances, Yellen did just about the only thing she could: while admitting that conditions in the global economy are becoming less supportive of the US growth outlook, she accentuated the positive developments in the domestic economy. First among these is, of course, the labour market, which has recently seen the unemployment rate slip to a near 10-year low and wages moving gradually higher after a long period of stagnation.
The barrage of unprecedented monetary measures unleashed after the 2007/08 financial crisis have been kept in place for much longer that anyone foresaw at the time. That being the case, it's hard to be surprised that businesses are unwilling to make the big investments that might get growth moving again: if the central banks are showing, by their words and actions alike, that the situation is still highly precarious, why stick your neck out?
There's no immediate evidence that Yellen's words of reason are having any influence. Markets are lower once again, and the fear/greed pendulum remains heavily biased toward the former. All the same, it's worth remembering the old economics adage, usually attributed to Paul Samuelson, that equity markets have predicted 9 of the last 5 recessions. For now, the fundamentals aren't nearly as bad as the markets are trying to price in, but it will take care and skill on the part of central bankers and other policymakers to keep it that way.
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