Will Yellen Get Trumped?

“Liftoff” stands revealed as a mistake. With the oil price lower than we expected, financial stresses are stronger than we expected, interacting with new regulations in Europe to destabilize already fragile banks. As expected, stocks have probed below their August lows, and are now trying to make a stand at the lower October 2014 lows. The equity risk premium is above the crisis-era mean, making stocks relatively attractive here, but betraying the whiff of fear. Yellen’s testimony yesterday made matters worse. Not even knowing the Fed’s legal footing to implement negative rates, Yellen is showing poor leadership – an inability to comfort markets that she will do “whatever it takes.” She comprehends the risks we face, but clings to the flawed logic that led to the “liftoff” error. With an election coming up, and with deepening recession likely to throw it to the GOP, Yellen may be forced to change course