Many observers looked at the decline in US bond and note yields and concluded Yellen was dovish, but analysts at BBH note that the best guide for Fed policy is not the coupon curve but the short end.  

Key Quotes

“The cleanest is the Fed funds futures.  The September contract was unchanged for the third consecutive session.  It is unchanged since the US jobs data last Friday, and the implied rate is half a basis point lower than it was at the end of June.  It is also at the same level it was at from June 16 through June 29.    There has been no real change in the market's expectations.”

“The December contract tells the similar story of stable expectations.  The implied yield on the December contract finished June at 1.26%.  For the past two sessions, it finished at 1.245%.  It was unchanged yesterday.  The claim in the media that Yellen signaled that the Fed would not rush to tighten policy is misdirection.  She and the Federal Reserve have never implied anything but a gradual increase.”

“Other reports said she emphasized the uncertainty over inflation.  It did not seem emphasized to us, but in the context of her remarks, was used as an example of the uncertainty in that she said was always present in macroeconomic forecasts.  The FOMC minutes were clear on this.  Most officials saw the softer core inflation readings as temporary.  That said, of course, Fed officials would feel more comfortable if core prices began slowly rising again, especially if spurred by stronger wage growth.”

“However, through the cycle, the Fed has not been in a hurry.  It can take its time now too.  It has hiked rates twice this year and anticipated three.  There are four meetings left in the year, and two of them are live for all practical purposes (Sept and Dec).  Official comments suggest a greater consensus has emerged to begin reducing the balance sheet before hiking rates again.  We see this most likely being announced in September, leaving a rate hike for December.  The idea that year-end considerations deter the Fed from acting then has been refuted in both 2015 and 2016.”

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