Yellen Transitions Toward "Meeting-by-Meeting Basis"
Yellen Transitions Toward "Meeting-by-Meeting Basis"
Janet Yellen testified before the Senate Banking Committee earlier this morning, skillfully maneuvering the Fed away from the handcuffs of some of the language that market participants had looked to as signposts for future rate increases. She merely stated that the Fed will begin removing the term “patient” and move toward a phase in which rate hikes are “possible at any meeting”. This was a well executed pivot away from the strict interpretation of certain phrases, and successfully allows the Fed to have the flexibility of being truly data dependent. And perhaps to some surprise, the Market liked it.
Going forward then, the Fed is free to focus on the labor market, which looks to be strong and improving, and the inflation picture. I have seen this chart from a number of sources, most recently from the Financial Times, claiming that prices in the US are actually in a deflationary state when housing data is stripped out as is done in Europe. I suppose you can look at price movements in various ways if you were so inclined, (here in the U.S. for example, Core CPI excludes food and energy costs which you could argue are precisely core items), but with the U.S. benefitting from a seven year head start over Europe in terms of recovery, its hard to imagine that the improvements we have seen in labor and housing won’t eventually work their way into prices.
The Market seems to think so too. Inflation expectations have risen steadily since the beginning of the year as the chart from Charlie Bilello at the bottom demonstrates. So while we don’t have any more clarity on the exact timing of rate hikes, Ms. Yellen has successfully paved a path toward an environment where Fed doesn’t necessarily know yet either. And the fact that the Market is now accepting that notion is a good thing.
Links for Charts:
http://ftalphaville.ft.com/2015/02/24/2120064/five-charts-to-help-the-yellen-fest/