Yellen Preview

March 29th, 2016 11:37 am | by John Jansen |

Via Stephen Stanley at Amherst Pierpont Securities:

Fed Chair Yellen delivers a luncheon speech to the New York Economic Club today.  The luncheon begins at 11:30 but the actual start of her speech is set at 12:20.  Her speech is entitled “Economic Outlook and Monetary Policy” so there’s not much chance that the speech fails to move the needle on the policy outlook.

The context for this speech is especially intriguing.  The March FOMC statement was viewed dovishly, particularly coupled with the downward move in the dots.  True to her stripes, Yellen’s press conference was even more dovish, as she gave a tepid assessment of the economy and waved off the recent uptick in core inflation as likely a temporary blip.  The markets digested the events of March 16 and decided that the FOMC was not likely to tighten until September at the earliest and probably no more than once this year.

Chair Yellen’s tone apparently did not go over very well with many other members of the FOMC.  Last week, a steady cavalcade of Fed speakers struck a much more hawkish tone.  Several even openly talked about April as a possibility for the next rate hike, a stance that no one would have walked away from the March 16 statement and press conference thinking was plausible.  Moreover, the officials who spoke last week were not all hawkish.  Presidents Lockhart and Williams, both considered centrists, specifically cited April or June as possible dates for the next rate hike.  President Harker, who had been mostly dovish in recent months, noted that “I think we need the Committee to get on with it.”  And President Bullard, who had turned dovish in February when inflation expectations fell, would not rule out an April hike and noted that the risks are rising that the Fed will fall behind the curve.  Only Chicago Fed President Evans, who is one of the most extreme doves on the Committee right now, sounded like Yellen, and he was only willing to say that he was generally satisfied with the rate path laid out by the median dots (for much of the past few years, he has argued for a more patient approach than the FOMC consensus).

Thus, I would look at last week’s string of speakers as about as close as a collegial institution like the Fed gets to a palace revolt.  So, in this context, the question for Chair Yellen is whether she wants to try to slap her subjects back into line with her March 16 thinking or acknowledge their concerns and try to position herself closer to the middle of the pack.  I believe that she will do the latter.  She will assuredly NOT talk about tightening in April (and indeed will probably not throw around any dates), but I suspect that she will amend and revise her tone to acknowledge more clearly the improvement seen in labor markets and take a more open-minded view with respect to the possibility that core inflation is beginning to heat up.  In short, I look for today’s speech to be her first move toward laying the groundwork for a June rate hike.

If this entire pattern is giving you a case of déjà vu, join the club.  You may remember that the September FOMC meeting/dots/press conference was also far more dovish than expected.  Coming out of that meeting, practically everyone in the markets and most economists walked away thinking that there was no way the Fed would raise rates in 2015, even though the dots still called for a hike before year-end.  Though the rest of the Committee was not as openly disgruntled then as they were last week, Chair Yellen felt compelled to come back a mere 8 days later and give a surprisingly upbeat speech on labor market conditions, providing what in retrospect was the first step on the journey from the super-dovish September FOMC meeting to an eventual December liftoff.  I suspect that we may look back in a few months and see a similar pattern in March, as today’s speech could be the inflection point that gets the Committee back on the path toward normalization.

Be Sociable, Share!
  1. 1 Trackback(s)

  2. Mar 29, 2016: 2:00PM Water Cooler 3/29/2016 | naked capitalism

Post a Comment