As we await a resolution of the debt ceiling and government shut down, current discussions center on allowing Congress a few more months to come up with a solution.  Simply put, our illustrious politicians appear set on kicking the can further down the road.  If this path continues, it is our belief that it will make it harder for the Federal Reserve to start tapering its easing program – forget about raising rates anytime soon.  Why?  The obvious reason is that any decision to taper now may affect deficit discussions.  Another reason is a government shutdown is bad for the economy.  Various studies suggest that GDP falls between 0.5% and 2% for each month the government is closed.  We do not believe the Fed wants either of these things to happen. 

Janet Yellen

     At the end of January, Janet Yellen will become the next Federal Reserve Chairman.  Yellen has a long history of experience with central banking.  She has been the vice chairman of the Federal Reserve for the past three years, was CEO of the Federal Reserve Bank of San Francisco for six years, and was an economist with the Fed before that.  Like Bernanke, Yellen comes from the “Keynesian” economic school of thought, which is more government centric (we prefer the Austrian school espoused by Hayek).  Yellen has a reputation as one of the central banks most employment-focused individuals and is more likely to be concerned with the unemployment rate rather than threats of inflation.  The current unemployment rate is 7.3% and the Fed’s targeted unemployment rate is 7%.  The Fed previously has said quantitative easing will stop once the unemployment rate approaches the 7% level.  However, some believe Yellen targets an unemployment rate around 6%.  Given her reputation of being more concerned with the unemployment rate than with threats of inflation, we could see the Fed continuing quantitative easing for some time.   In her own words:

“When the goals conflict and it comes to calling for tough trade-offs, to me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target.” – Janet Yellen

Thoughts on the Market

     As we mentioned in our last update, the market is moving based on the debt news du jour.  The current discussions in Washington don’t solve the long-term deficit problems – Social Security and Medicare – and volatility may continue for the next few months.  Longer-term, the problems in Washington will keep the Federal Reserve focused on employment rather than inflation.   Having a portion of your portfolio invested to protect against inflation is still a wise course at this time.   

Sincerely,

 Your THOR team