Hiking the Federal Funds Rate by a-quarter-of-a-percent Dec. 16, 69-year-old Federal Reserve Board Chairman Janet Yellen tried justified her decision citing the citing the November jobs report and drop in the unemployment rate to 5.0%. Yellen promised to look at the Fed’s inflation gage now running a 0.8% to guide further hikes, despite knowing that the global economic slowdown, especially in China, would likely depress inflation for some time to come. With the nation’s GDP running at under 2%, Yellen should have left rates alone, knowing the economic uncertainties ahead. Yellen barely mentioned about the failure of Mutual Fund Third Street that told investors no withdrawals could be made for at least one year. Yellen knows mutual funds tied to junk bonds are melting down, potentially creating a contagion on Wall Street and other global stock markets.
Dropping nearly 4% in two days, Wall Street rained on Yellen’s Christmas rally, hoping a rate hike signaled the economy’s improving health. Raising rates did exactly the opposite, highlighting that global markets remain fragile with slower growth expected in China and Europe. Billionaire investor Sam Zell talked about a looming recession in 2016, criticizing the Fed’s move as an hour-late-and-dollar-short. “There is a high probability that we are look at as recession in the next 12 months,” said Zell, disputing the Fed’s rosy picture. Zell thinks raising rates acted beefed up the U.S. dollar, hurting the export and manufacturing sector. “The strong dollar is having a tremendous impact on U.S. production and U.S. businesses,” Zell thinks Yellen only slows an already sputtering economy. Yellen highlighted jobs growth and lower unemployment rate to justify her rate hike.
Zell and other economists see the jobs gains largely at the low end of the income spectrum, having little effect on the consumer economy. Zell’s sentiments mirror those of fellow billionaire investor and Trump campaign economic advisor 79-year-old Carl Icahn seeing dark clouds ahead. “The middle class investor has nowhere to go with their money but into the [stock] market, or, even more concerning, high-yield bonds, which are very risky,” said Icahn, concerned about Third Street’s—and other high-yield bond mutual funds—liquidity problems. Zell and Icahn see weakness in the high-yielding mutual funds tied to the energy sector. “Energy pricing has gone down, therefore the margins have gone down,” said Zell. “There are all kinds of junk bonds being renegotiated. There ‘s little doubt that the junk-bond market is going down,” triggering Wall Street’s sell-off.
If junk bond mutual funds continue to tank, it’s going to trigger short-selling in the equities markets, driving stock prices even lower. With the Dow Jones industrials about 1,200 points off its May 19 record high 18,312, there’s a risk that short-selling could turn the six-year-old bull market into a recession-prone bear. Yellen’s Dec. 16 rate hike, as Zell points out, may be too late to reassure various markets. Any substantial drop in the stock market could turn today’s 2% GDP growth into negative numbers. On a positive note, newly minted House Speaker Paul Ryan (R-Wis.) slammed through his year-end budget, averting a government shutdown. Adding $1.4 trillion in 2016 spending, Ryan got his $680 billion in tax cuts over 10 years, bound to add to the nation’s shrinking budget deficits. If Wall Street continues to meltdown, 2016 federal budget deficits would soar.
Both parties wanted to get out of Dodge without a looming government shutdown, willing to ignore the whopping $1.4 trillion increase in the federal budget. Ryan touted the measure as proof of his bipartisan leadership but other voices weren’t too sure. “Washington’s leadership has created another massive spending bill in secret and reamed it through Congress, hoping that the American people don’t notice or have become numb to this kind of business as usual,” said 43-year-old GOP presidential candidate Sen. Marco Rubio (R-Fl.). Rubio missed the vote while fellow GOP candidates Sen. Ted Cruz (R-Texas) and Sen. Rand Paul (R-Ky.) voted against the omnibus budget bill. Most House and Senate Democrats, with some notable exceptions, like Democratic candidate Sen. Bernie Sanders (I-Vt.), voted against the bill because to the whopping tax cuts.
While denying that they watch Wall Street’s ups-and-downs, Fed officials need to look carefully before the current meltdown pushes the economy into recession. Yellen knows she ended the Fed’s bond-buying program AKA QE3, Oct. 29, 2014, taking a key stimulus out of the economy. Raising rates had more symbolic value, bolstering the Fed’s hope that the economy continues to grow. With the unfolding junk-bond mutual fund crisis, Zell, Icahn and others see the economy slipping back into recession in 2016. Ignoring the sluggish U.S. GDP growth and low inflation number, Yellen banked on a full-employment economy to save the day. Most economists are skeptical of the low-wage and part-time jobs feeding the Labor Department’s unemployment rate. Nothing can hurt economic growth more than shorts taking over Wall Street. Fed officials better come up with Plan B if Wall Street and the economy head south, spelling trouble for inflation and U.S. GDP.
