Fed Chair Yellen reaffirms new doveish stance ..... unlike some of her colleagues.

Wednesday 30th March 2016

Fed Chair Yellen reaffirms new doveish stance ..... unlike some of her colleagues.

ref :- "Yellen Takes Control of Fed Message to Stress Gradual Approach" , Bloomberg online

One or two commentators are saying that Janet Yellen's address to the Economic Club of New York yesterday was her best performance since becoming Chair of the Federal Reserve. We're not sure that we'd like to be overly gushing on that front but we can see the point they're making : there have been mixed messages emanating from Fed officials since Ms Yellen's doveish statement on March 16th, and an authoritative showing that displayed leadership qualities was required. The consensus view is that she delivered, though whether she's managed to pull some of the more hawkish of the FOMC's 17 members into line only time will tell. At the very least, she'll be hoping that Fed bosses Bullard of St. Louis, Harker of Philadelphia and Lockhart of Atlanta will be a little more guarded with their comments.

In reasserting that a more cautious attitude to the pace of future rate hikes Ms Yellen emphasised once more her concerns over fragile global market conditions, stuttering overseas growth (particularly China) and low oil prices. There were also implied worries about the ramifications of a stronger US dollar, and for the first time some doubts that the rise in her preferred measure of core inflation, which at 1.7% is nearing the optimum 2% level, is in fact as sustainable as has seemed likely up to now. She was also at pains to point out that caution was a prerequisite when such low levels of interest rates meant that should events take a nasty turn, the Fed has little monetary ammunition at its disposal.

In effect, the speech was a restatement that policy decisions would be data-dependent. Some might argue that policy is not so much data-dependent as market-dependent, which is not the same thing. In an ideal world of course that would be true, but in these far from ideal global conditions the view currently holding sway is that any rash moves by the Fed could provoke such global turmoil that the performance of the US economy would be bound to suffer as a consequence and therefore one cannot be considered without the other.

Ms Yellen has been making some more relaxed comments of late regarding the possibility of the US economy and inflation overheating a little. So in theory, and taking things to a logical extreme, if global conditions so demanded it would be  possible for there to be NO rate hikes this year, never mind just a reduction from four to two. At this stage that might seem an unlikely scenario, but it's one that does have it's followers.

Anyway, the market effects of Ms Yellen's caution were as you would expect : weaker dollar, bond yields down / bond prices up, equities higher .... Of course, we saw the same thing after the March statement and it didn't take long for some officials to introduce a more hawkish tone into their rhetoric. If the Chairwoman has stamped her authority firmly enough on her colleagues that may be less likely to happen this time round, at least in the immediate future. But it seems to us that she'll still have to work pretty hard to prevent Fed members giving the impression of being divided over policy ..... and that's not helpful to anybody.

** Speaking of being data-dependent, US Employment stats come round again on Friday and as ever they will be significant. Consensus forecasts:

Non-Farm payrolls : +210,000

Unemployment rate : 4.9%

Average Hourly Earnings : +0.2