Chair Yellen non-comital on rates - AGFXC

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that unlike the more hawkish Williams, Yellen gave no indication on the rate of payrolls gains that is consistent with a tightening labor market and she said nothing about the remaining slack in the labor market.

Key Quotes

“Overall the outlook for growth remains moderate and emphasis is on a gradual policy tightening.  Such that the next hike, should it come this year, may not be followed quickly by a third this cycle and the Fed will remain cautious and closely watching for ongoing evidence of labor market tightening and higher inflation.

The Fed requires the labor market data, in particular, to remain solid and show evidence of tightening.  Should this stall or soften, rate hikes will immediately be pushed off the agenda.  As such there is an asymmetry in how the market may respond to USA data.  The USD will probably respond more decisively and bearishly if the data improvement stalls again.  If payrolls remain on the recent trend (190K average over the last three months) with limited evidence of further tightening in the labor market, then the Fed will be divided and the cautious gradual attitude of most FOMC members may incline the Fed to inaction.

On the current policy outlook, Yellen said:

“U.S. economic activity continues to expand, led by solid growth in household spending. But business investment remains soft and subdued foreign demand and the appreciation of the dollar since mid-2014 continue to restrain exports. While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market. Smoothing through the monthly ups and downs, job gains averaged 190,000 per month over the past three months. Although the unemployment rate has remained fairly steady this year, near 5 percent, broader measures of labor utilization have improved. Inflation has continued to run below the FOMC’s objective of 2 percent, reflecting in part the transitory effects of earlier declines in energy and import prices.

“Looking ahead, the FOMC expects moderate growth in real gross domestic product (GDP), additional strengthening in the labor market, and inflation rising to 2 percent over the next few years. 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. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook.”

The market reaction to this speech was indicative of the non-committal nature of these comments. Yields and the USD rose, fell, then rose again to close higher. She said, “The case for an increase in the federal funds rate has strengthened in recent months.”

So a hike has become more likely, but how likely? In May, Fed members including Yellen said a hike was “likely” in the summer.  Recent Fed comments still fall short of this clear guidance.  Of course the summer hike did not happen and the probability collapsed after the weak May payrolls report.

One might conclude that there is still a wide range of opinion at the FOMC and Fed members are unwilling to commit until at least they see one more jobs report.”