Dollars and Sense: Fed stays the course but market uncertainty continues

Fed stays the course. The Federal Reserve met last week and decided to leave interest rates unchanged—at near zero percent. That decision wasn’t a surprise. Surveys of economists and analysts leaned toward the Fed not raising rates. More market-based indicators—the futures markets—said rates were not going to be raised. Still, the move, or the lack of movement, caused a lot of discussion. After all, it’s been more than a decade since we’ve seen rates rise. The economy has met the employment goals the Fed set for an interest-rate hike. Consumer inflation is still below target levels, but asset inflation is well above the targeted 2 percent level.

Why not now? So why did the Fed decide to wait? Chairwoman Janet Yellen said the employment picture is better, but not quite good enough. Then there’s China and other overseas markets, which she strongly suggested influenced her decision. But the third thing I heard was that the Fed wanted to wait for “further evidence.” What further evidence is she looking for, since the employment picture changes slowly and is not likely to get much better—or worse—in the next few months. With few signs of inflation picking up, new reports there won’t make much difference. I honestly think she was making an obscure reference to the U.S. political process. The United States still doesn’t have a budget, and a government shutdown would have an effect on the markets, though probably not on the economy as a whole. The Fed is supposed to be apolitical, but that was about as close to a political statement as Yellen is likely to make.

Fed decision consequences. A lot of the volatility we’ve seen in the markets has been a result of uncertainty by the Fed, and that uncertainty continues. The vote among the Fed decision-makers wasn’t close—9 to 1—a testimony to Yellen’s ability to build consensus. She is gaining a reputation as a smart economist and a savvy political operator. But she might be open to legitimate criticism over the extent to which she said China and other foreign countries factored into her decision-making. That is definitely an expansion of the Fed’s portfolio. Yellen was trying to influence foreign leaders, especially central bank leaders, in their decision-making process. Some critics have, over the past few days, suggested Yellen was making a subtle play for the Fed to be the de facto central bank not just for the United States, but for the world.

Life goes on. The Fed meeting didn’t provide the only financial news last week. On Tuesday we got new data showing retail sales continued to climb in August. We also got some interesting corporate news. The United Auto Workers union said it would keep talking with Fiat Chrysler Automobiles to reach a new contract and called off immediate plans for a strike. That’s good news for Fiat Chrysler, but some are wondering whether it’s a sign union power is continuing to slip.

Mergers and acquisitions. The merger and acquisition markets continue to be active, too. We heard about a couple of relatively small deals. For example, Gray Television said it would buy Schurz Communications’ television and radio stations for $442.5 million. These companies are not household names, but they own radio and television stations in more than 100 mid-sized markets. So this acquisition is kind of big news in the media space. But the big acquisition involved not television, but one of television’s biggest advertisers. Anheiser-Busch InBev is trying to take over SABMiller, another major beer brand. That news caused a jump in both companies’ stocks, as well as other brewers. A combination of the two would create a massive conglomerate worth a combined $275 billion. Any potential deal likely would be heavily scrutinized by regulators in the U.S. and overseas.

The week ahead. It’s going to be a very light week for government reports. I’ll be in Washington this week talking with lawmakers on the Hill about the budget. Congress has until Sept. 30 to get a deal done. This is a process that’s always full of drama, but this year the stakes are higher than normal because of Planned Parenthood funding, the upcoming election, and the effect a shutdown on the one hand, or continued deficit spending on the other, will have on the overall economy. The fact that so much of our economic life depends on Washington is troubling, of course, but fascinating. Watching the 535 members of Congress make a budget is sort of like watching a 535-car pile-up. You know it’s terrible and that people are getting hurt, but at the same time you can’t look away.

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