Yellen Emerges, Sees Her Shadow, 4 More Weeks

In Janet Yellen’s speech titled The Federal Reserve’s Monetary Policy Toolkit (read full text here) she used Jackson Hole as a venue to discuss the near term outlook for the US economy and what it means for monetary policy. She said specifically on policy:

“Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives. Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”

The first sentence is standard, the 2nd one is an intentional attempt to warn the markets that September is a growing possibility and it is why short rates are higher. The 2 yr note yield jumped to .82% initially but then backed off. The 2s/10s spread is now flattening further to 76 bps, a level last seen in November 2007. Not a ringing endorsement of the sentiment regarding the ability of the US economy to deal with MAYBE another rate hike. The stock market is whistling past the so called ‘yard’ if they think a rate hike is a good thing for it but the stock market also knows that it’s been a very good bet to assume the Fed won’t hike.

The caveat of course to Yellen’s warning is in the sentence that followed:

“Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook”

Which means we’ll be having the same exact excruciatingly annoying discussion over what they will do for another 4 weeks. Blah, Blah, Blah.

Bottom line, if you thought today was going to tie up some loose ends for September, it didn’t but she at least confirmed what Fischer and Dudley said that don’t be so nonchalant that a hike next month won’t happen.