Janet Yellen, the Federal Reserve Chair spoke to community development professional in Chicago on Monday, March 31 and made it clear that for the health of the job market we need low interest rates for quite some time to get the market back on track. Even thought the Federal government is scaling back their monthly bond buying purchases later in the year, Yellen stressed that do not have plans to raise the short term rate at any time in the new future. The Fed purchasing the bonds has been in an effort to keep long-term interest rates as low as possible.
Yellen comforting the public in this way has put investors at ease. She was clearly indicating that the Fed does not have plans to raise short-term rates. Many investors feared that this would come up by the middle of next year. Yellen’s remarks indicate that there is more time before short-term rates are affected. The reasoning of the fed may be that a short-term increase would have big consequences for borrowing costs and stock prices. This was Yellen’s first major speech since taking the office of the Federal Reserve Chair and she stated that she thinks, “this extraordinary commitment is still needed and will be for some time, and I believe that view is widely held by my fellow policymakers at the Fed.”
Just after Yellen spoke at the conference stocks began to rise. At the close of the day Monday the Dow Jones industrial average was up 134 points. Yellen also noted during her speech that the U.S. job market is still not improving as fast as it should. Because of this less than stellar recovery the market needs low interest rates to encourage citizens to borrow and spend.
CVS has lost almost $2 billion a year in potential revenue by becoming the first national drugstore chain to voluntarily stop selling cigarettes and other tobacco products. The chain made their decision in early February and will institute it by October 1st, 2014. Many state attorney generals have been putting pressure on businesses and CVS was the first major brand to cave. State attorney generals have not tried legal action but this has happened before with another addictive substance, think soda and NYC. Mayor Bloomberg’s attempt to limit the size of soft drinks failed because legally he couldn’t dictate what consumers could purchase. The same may be said of cigarettes, however they have a much more adverse affect on health than soda. Regardless of whether the use of cigarettes can be legislated, drug stores are feeling great pressure to stop offering them to customers.
Other pharmaceutical retailers that sell cigarettes and other tobacco products include Wal-Mart, Walgreen, Kroger, Rite Aid, and SafeWay. The Attorney Generals have been putting pressure on each of these chains to stop offering tobacco products in their stores. Each of these companies will lose a great deal of revenue if they stop the sale of tobacco products, so what is the incentive? CVS was happy to lead the charge because they have reaped the benefits of positive press coverage and receiving goodwill from many consumers. Losing tobacco may hurt the company’s annual sales for a while, but they are confident they will catch up again.
The other two major chains, Rite Aid and Walgreens are now in a tough position. If a second chain goes tobacco free they will miss out on the positive press that CVS received because they will be second. Additionally, if two major pharmacies are tobacco free it leaves all of the tobacco business with the third. Either way, there is increasing pressure from possible legislation so someone will have to act soon.
Manufacturing in the U.S. has expanded at a faster pace than originally projected for February. In January, The Institute for Supply Management’s manufacturing index rose from 51.3 in January to 53.2. Additional figure showed consumer spending climbed more than expected in January. Additional estimates may have been low because of considering home heating bill and households enrolling in the Affordable Care Act.
This pickup in manufacturing may have been even stronger if not for a slight slump in production. The slump was due to a shortage of parts, but this means orders will improve directly, after stockpiles are replenished. Senior economist at Ameriprise Financial Inc., Russell Price states that “manufacturing remains a bright spot for the economy…there’s still a sizable amount of pent-up demand in the consumer and corporate sectors.”
As far as the Global manufacturing goes, things are mixed. China had a couple factories decline in February and the index from the HSBC showed a seven-month low. In Europe, manufacturing was higher than previously estimated. France had a seven-month high in manufacturing and the index in the euro region rose significantly.
In the U.S., manufacturing accounts for 12 percent of the economy. Production has recently been slowed because of inclement weather throughout the country, but should pick up with a high demand for backlogs. Bradley Holcomb, the chairman of the Institute for Supply Management conducted a survey that indicated there was “pretty broad-based optimism” in regard to future orders. Additionally consumer spending has increased more than expected for January. Purchases account for nearly 70 percent of the economy and this also rose.
Specifically, there has been more spending on construction projects, according to the Commerce Department. This marks a housing rebound with home renovating chains like Home Depot and Lowes showing higher sales. Once the harsh winter weather subsides we may feel the full effect of less fiscal restraint and progress in the job market that will boost the GDP.
On February 1st, Ben Bernanke will no longer be the Federal Reserve Chairman, and we will begin the reign of Janet Yellen, the newly appointed Federal Reserve Chairperson. Considering that the Fed just celebrated its 100th birthday and employs more Ph.D. economists than any other institution in the world, you’d think that the Fed would have monetary policy down pat. However, it doesn’t. Yellen herself admits that setting interest rates is often a shot in the dark. “I consider it essential, in making judgments about the stance of policy, to recognize at the outset the limits of our understanding regarding the dynamics of the economy and the transmission of monetary policy,” she said in a 2012 speech at NYU.
Yellen’s humble attitude will certainly well assist her as Chairperson, since just about every single issue she’ll deal with will be wrought with uncertainty. Is the U.S. economy stagnating, or threatening to overheat? How quickly should the Fed taper its purchases of long-term Treasury bonds and mortgage-backed securities? When should it begin to raise the federal funds rate, which has been nailed to the floor at zero to 0.25 percent since the end of 2008?
These dilemmas are generally looked at through a hawk-vs-dove monetary prism, but they are deeper and more interesting. The three big questions that Yellen will have to deal with answering will be thus: What is the most optimal amount of Fed control and oversight? How is the best way to manage economic and industry bubbles? What is the right proportion of mystery and transparency the Fed must maintain?