CNBC's Ron Insana warns that most other economic pundits have glossed right over one word in Federal Reserve Chair Janet Yellen’s recent public speech which should have raised some alarms on Wall Street.
In her Friday speech to the Executive's Club of Chicago, Yellen “used a word that I have not heard in almost a decade to describe the coming shift in policy and I suspect it is a word that has a more important meaning than the market currently accords it,” Insana wrote for CNBC.com.
Yellen said: "As I will explain, this policy stance seems appropriate given that the underlying trend in inflation appears to be still running somewhat below 2 percent. But as that gap closes, with labor market conditions now in the vicinity of our maximum employment objective, the Committee considers it appropriate to move toward a neutral policy stance."
For the first time in nine years, the Fed is openly discussing a neutral interest rate policy, “which to paraphrase Yellen, is neither accommodative nor contractionary,” Insana said.
“That is a very big deal given all of the Fed's most recent statements have suggested that policy will remain accommodative despite expected increases in the interest rate that the Fed controls,” Insana said.
“I am becoming slightly more wary, in the wake of Chair Yellen's 'neutral' comment, of Fed policy going forward,” Insana wrote.
“It has long been deemed to be the Fed's job to take away the punch bowl before the party gets started. The Fed, expecting the party to get a little wild if we see tax reform, massive de-regulation, a $1 trillion infrastructure spend and a 10 percent increase in defense expenditures, could get a little more sober than the rest of us, at a slightly faster clip," Insana wrote.
"And we may be simply too inebriated to notice the buzz kill,” Insana wrote.
“Some have argued the Fed has been drunk with power over the last decade or so. But if the Fed is about to sober up, we may want to have some coffee and aspirin ready, in the event we get a little too tipsy for our own good.”
To be sure, Insana isn't the only economic guru wary of the Fed these days.
Former Reagan economic adviser David Stockman urges President-elect Donald Trump to remove Federal Reserve Chairman Janet Yellen as soon as possible because she orchestrated the “massive bubble” he sees in the record-setting stock-market rally.
“She out to be put out to pasture as soon as possible,” he recently told Fox Business Network.
"Ask for resignation on January 20th because unless this bubble is lanced, there is a huge bubble in these markets, the Trump administration is never going to come out the other side,” said Stockman, who served as a Republican U.S. Representative from the state of Michigan (1977–1981) and as the Director of the Office of Management and Budget (1981–1985) under President Ronald Reagan.
"And he would be well advised to clean house, if you want to drain the swamp, the place to start is in the (Federal Reserve) building because where this entire false economy, this big fat, ugly bubble that Trump talked about during the campaign actually originates,” he said.
He said Yellen has “no clue that this is a massive bubble. S&P is trading at 25 times earnings. Look at what happened to the Russell since the election, up 20%. Up 40% since last February. It's trading by the way at 247 times the actual earnings of the Russell 2000. So we have a Fed that has created massive distortions, total mispricing in bonds and stock markets. Very unstable bubble everywhere,” he said.
(Newsmax wire services, Reuters and Bloomberg news contributed to this report).
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