Like a baseball GM, Yellen must decide on a deadline trade
How is Major League Baseball in midsummer like the Federal Reserve on the verge of a policy change?
Once you start considering the question closely, the similarities pile up. The lopsided majority of baseball trades in a given season happen in the week before the July 31 trade deadline – with this year’s cutoff being 4 pm on Friday.
Teams like to wait as long as possible to determine if they’re positioned to contend as they are, or if they need to add one more player to gain a solid edge, or if it’s time to give up and rebuild for next year. They decide, in other words, if the pre-season plan is working fine, or if they need to be buyers or sellers of talent.
The Fed doesn’t have a strictly defined deadline for lifting interest rates from zero, but its preseason plan was to get there by the end of this year and September is now the focus. So Fed officials need to assess how their expectations for growth and jobs and inflation are playing out before they decide whether to become a “buyer” of the sustainable economic improvement idea by bumping up rates a bit, or a seller by waiting until next year.
And just as general managers wait as long as possible to have plenty of information before committing to a trade, Fed Chair Yellen will logically take as much time as she can to make her call. That’s why today’s meeting won’t be too explicit or instructive about exact plans. At minimum there are two months of data ahead of that possible September decision.
The baseball-Fed metaphor can be carried further: Everyone in baseball has the same player-performance stats, but teams make value judgments and educated guesses about how a player’s production might change, which alters estimates of what he’s worth.
Everyone sees the same economic data as policy makers, but the Fed has its own models and institutional priorities that dictate how they weigh them. There’s also been a story line building for months now that the Fed will look to make a move, almost just for the sake of making a move.
It’s been long enough, goes this logic, the Fed wants to get the “normalization” process started and send a message that things are getting better. This is a bit like the marginally contending team pulling the trigger on a trade mostly as a signal to its fans that it believes it can make the playoffs - whether that's realistic or not.
It isn’t clear the Fed is truly interested in this kind of longshot, theatrical gesture. But many on Wall Street seem to think this is the case, and perhaps there’s something to the idea that the Fed realizes the marginal benefit of staying at zero rates for longer is diminishing.
A final resemblance of baseball to the Fed game: It’s hard to predict how the public – in the form of fans or the markets – will respond. Sports-talk radio callers will complain about a team’s bold trade if it seemed to give up too many valuable prospects, even if short-term help from a quality player is welcome.
For the markets, there’s no doubt that investors should, and mostly do, want to see the conditions under which a Fed rate hike is warranted. If the Fed moved now, it would already have come at a point when unemployment is lower than it’s often been when tightening starts, and when financial markets have gone an unusually long way toward reflecting better times and plentiful credit.
But this will remain a close call, largely because global markets are throwing tantrums and inflation is well in check.
So Janet Yellen is like the GM of a .500 team, publicly stating that all potential deals remain on the table, deciding whether to be a buyer or a seller, unwilling to be rushed into a deal – or to avoid one – just because the emotional fans on either side are yelling that they know exactly how this team can be fixed.
