Business world awaits Yellen’s assessment of Brexit

This week we will pay close attention to her remarks on Great Britain’s pending exit from the European Union.
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Last week economy watchers focused on Fed chairman Janet Yellen’s testimony before U.S. congressional committees on the American economy and the prospects for increases in the Fed’s key lending rate in the months ahead.

This week we will pay close attention to her remarks on a different subject – Great Britain’s pending exit from the European Union. Yellen will speak Wednesday as part of a panel that also will include Bank of England Governor Mark Carney, European Central Bank President Mario Draghi and Brazil Central Bank Governor Alexandre Tombini at a European Central Bank conference in Portugal.

The financial world will want to know how she believes Brexit will affect the American economy and U.S. monetary policy.

Other Fed officials will be speaking in London this week. St. Louis Fed President James Bullard will address the Society of Business Economists in London on Thursday. Cleveland Fed President Loretta Mester will speak at a separate London event Friday.

Britain’s decision late last week to leave the EU caused political turmoil and rocked stock markets worldwide. On Friday the Dow Jones industrial average fell 3.4 percent, the S&P 500 index dropped 3.6 percent and the Nasdaq composite index lost 4.1 percent.

On Monday the bleeding continued. The Dow fell 1.5 percent, to 17,140.45, the S&P 500 lost 1.81 percent, to 2,000.56, and the Nasdaq dropped 2.41 percent, to 4,594.44, leaving the three major indexes with their worst two-day drop in 10 months.

"This is going to take a while to unwind. It will not occur overnight," Tom Siomades, head of Hartford Funds' Investment Consulting Group, told The Street during the weekend.

"I see this as a Black Monday-type scenario where markets will be down sharply over the next few days; however, the fundamentals have not changed, and markets will recover."

Siomades told The Street that the Fed could find it difficult to raise interest rates for the rest of the year not only because of the uncertainty related to Europe’s troubles, but also because of the sharply contested U.S. presidential election.

In the short term, the risk to the U.S. economy from Brexit is relatively small, the New York Times reported. What is more concerning is the possibility that the push for free trade agreements and other policies that political elites and companies with international business have favored for more than 25 years could falter.

“I think a lot of the market reaction is less about the financial impact and more about populism and what it means for the liberal economic order,” Glenn Hubbard, a top economic official to President George W. Bush who now serves as dean of the Columbia Business School, told the Times.

He also said the Brexit vote reflects a deep distrust of the benefits of the global economic system among many European and American voters and a broadly held view that governments aren’t working well.

“Both of those forces have a lot of wind at their back,” he said.

“In the near term, you’re seeing markets being roiled, and feedback effects for the Federal Reserve,” Hubbard said. But for now, at least in the United States, “I don’t think it’s going to raise recession probabilities.”

This morning we will get the Commerce Department’s final report on U.S. first-quarter gross domestic product. The economy slowed at the start of the year, in large part because consumers decided to save money rather than spend it.

Economists’ consensus estimate, according to MarketWatch, is that the growth rate will be 1.1 percent, up from the most recent estimate of 0.8 percent.

The Conference Board will issue its report for June today, and the prediction is that the index rose slightly, to 93.0, from 92.6 in May. Bloomberg said economists think lingering concerns about job growth will keep the index near what is a six-month low.

Reports for May on personal income (an 0.3 percent gain is forecast), consumer spending (an 0.4 percent gain is predicted) and core inflation (an 0.2 percent rise is expected) will arrive on Wednesday. Bloomberg said economists think consumers tempered their spending in May, bringing purchases more in line with growth in their income.

On Friday, the Institute for Supply Management’s June report is expected to show that U.S. manufacturing barely expanded, as factories remain bogged down by struggling overseas economies and limited business investment, Bloomberg said.

We won’t see the influence of Brexit in this week’s reports, but weaknesses would be particularly unwelcome under the circumstances.

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