Tagged: Yellen

Yellen the hawk

The Fed economic projections were dovish, with inflation forecasts for next year slashed, while the median dot fell for the first time since they were introduced:

2015 1.3 from 1.75
2016 1.85 unch
2017 1.9 from 1.95

2015  5.25 from 5.5
2016  5.1 from 5.25
2017  5.1 unch

GDP unch

2015 median has come down by 25bp
2016 down by 37.5bp
2017 down by 12.5bp

The statement added in the word “patient” while also retaining “considerable time” (!) – they really didn’t want to frighten the horses:

‘Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. ‘

The main change to the statement came over the language on inflation:

Before: “the likelihood of running persistently below 2% has diminished somewhat
Now:  “inflation to rise gradually… as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate”

There were 3 dissenters, both hawks and doves! But note all of them become non-voters next year – i.e. this was their last meeting to vote:

Kocherlakota (dove) – upset it’s not dovish enough, as he was last time
Fisher (hawk) – thinks growth has moved forward, wants earlier rate rise
Plosser (hawk) – objects to the passage of time element in the forward guidance

But then Janet Yellen took the podium and spent most of her time talking about rate hikes, while batting away any worries about inflation and market pricing:

“unlikely there will be any change in policy for the next couple of meetings”. Later she confirmed “A couple means 2”
-> This means April would be first meeting in play

But she also went on to say:

“every meeting is live”… “No meeting is completely off the table”… “I want to STRONGLY DISCOURAGE expectations that only meetings with press conferences will have policy moves” (she says they could do a press conference call instead).

She’s not bothered about inflation risks from oil:
“the decline in oil prices is likely to be a net positive”
Asked about decline in 5y5y inflation expectations, she says it may reflect inflation premium, and “jury is out” on how to read it

She’s not bothered about Russia:
“Russia spillovers to US likely to be small”

She’s not bothered about market pricing being underneath the Fed’s:
“recognizes market has different rate view than the Fed” but then that’s because they may have different economy view

She talks about the path from here:
“it’s not likely to be a carbon copy of 2004 tightening cycle”
“People may not want to repeat pace of 0.25pt moves”

And finally, the Mark Carney classic line:
“even when we start, policy will remain accommodative”

Just in case you were in any doubt: FOMC “Are getting optimistic the recovery headwinds are lifting”

The mixture of lower dots but a confidently hawkish Fed Chair sounds like a recipe for higher USD/JPY from here… if anyone still has any money left to play with this week!

All you need to know is Kocherlakota, not Plosser, dissented

Summary of the main points from the FOMC below but all you really need to know about the Fed is that the dissenter was uber-dove Kocherlakota, rather than uber-hawk Plosser. The discussion clearly had more of a hawkish tone than a dovish one. Key changes to the statement:

* Underutilisation of labour resources is no longer “significant” – rather it’s “diminishing”
* “Considerable time” remains but reiterates Yellen’s Jackson Hole message that rates could go up sooner if data  improves (or later if not)
* Inflation expectations haven’t fallen as much in surveys as they have on market-based measures
* Chances of inflation remaining “persistently” below 2% have diminished
* No reference to Eurozone woes or other global issues

The market reaction is – as ever – as much about positioning as fundamentals. The short base in US rates was largely taken out in the flash crash, leaving room for a hawkish report to have more of an impact than a dovish one. However, the question now is whether the yield hunters pile back in. This will depend on two things:

1. The data. It’s not just that the Fed have reiterated they are data dependent, but that employment rather than inflation is what affects their dial. The statement witheringly dismissed the market’s alleged disinflation worries by saying that “Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable” – i.e. people aren’t as worried about deflation as the market is. And it’s real people and the real economy that matter more to the Yellen Fed: In her first big speech she said ‘our goal is to help Main Street, not Wall Street’. Next week’s non-farm payrolls report takes on even more significance from here.

2. Volatility. This year’s obsession has been the persistent decline in volatility across all markets, in the face of various geopolitical issues as well as economic divergence. Carry became king. This has been blown out of the water since the volatility spikes of the past 2 months. Or has it? Vols have settled back down to their end of September levels – though this remains above the summertime lows:
cross market vols 30 Oct 2014
The volatility shock may therefore have dissuaded some yield hunters, but not all of them. There is money that needs to find a home that will buy dips in fixed income – the 2yr has now hit the 50bp rate that will look attractive compared to the 25bps of 2 weeks ago. Yet the volatility cat is out of the bag. They can’t keep piling in with impunity.

Putting these together, the balance is tipping back towards higher rates, and a higher dollar, along with higher volatility, from here. For the balance to tip decisively, the missing part of the puzzle is the data. Next Friday’s payrolls report should provide the answer.

Ahead of #J-Ho, A reminder of the argument of the #FOMC hawks

Yes, we are really calling it J-Ho. Jackson Hole just got Twittered.

Ahead of that, here’s a reminder of the charts from the presentation by Bullard on just how close the Fed is to achieving the goals of its dual mandate (first released 9th June, updated 17 July) http://bit.ly/1p0aybf:

1. The Fed is closer to its macroeconomic targets today than it has been for most of the time since 1960; meanwhile the massive and prolonged stimulus means the policy stance is still far away from being normalBullard 1

2. He explains that the ‘mismatch’ between these two lines is driven by the labour market, a topic we expect to be covered at length by Yellen at the symposium. His chart explaining that the labour market is “not fully recovered” actually looks pretty decent and shows the improvement in the past 5 years. The area that needs to catch up is the bottom left panel, the part-time workers and low job finding rate.
Bullard 2

For the hawks to win the day, they need to argue either that this area is also improving, or that it is a lagging indicator of labour market strength.

So when Yellen speaks at J-Ho, how much improvement will she admit that there is in the labour market? Fischer’s speech ten days ago suggests that the doves still feel the jury is out http://blondemoney.co.uk/2014/08/stanley-fischer-speaks/

After all, we know that the “optimal control” view of monetary policy is to let inflation overshoot so that you entrench economic growth. Will the FOMC’s hawks take a lesson from those on the MPC, and use the language of the doves to win over their colleagues? That is, can they convince the doves that hiking sooner means doing less later? And that the lag of monetary policy means Bullard’s ‘mismatch’ must be addressed now?

Carney looks prepared to move with the midpoint of his committee, but Yellen has been known to say that the Fed is not a democracy. Those going into this weekend’s meetings short of US fixed income might pay heed to the words of another female leader – ‘this lady’s not for turning’.


Stanley Fischer speaks


  • The labour market still looks weak
  • The housing market is still vulnerable to higher rates
  • So the US may be facing a ‘secular slowdown’
  • ….But it’s very uncertain
  • Low interest rates can play their part, and macroprudential policies can stave off financial stability risks
  • He’s more Yellen than not (he now says Fwd Guidance ‘can be successful’)

* He’s worried about poor growth globally, particularly with EM growth disappointing:

Year after year we have had to explain from mid-year on why the global growth rate has been lower than predicted as little as two quarters back… This slowing is broad based–with performance in Emerging Asia, importantly China, stepping down sharply from the post-crisis surge

* This matters, because central banks have to separate out ‘the cyclical from the structural’ and ‘disentangle demand and supply factors’. The 3 factors that have held back demand in the US:

1. ‘Unusual weakness‘ of the Housing Market – which got slammed by the spike in yields after the taper tantrum: The sharp rise in mortgage interest rates in mid-2013 likely contributed to this setback.

2. Previous drag from fiscal policy

3. Weak growth elsewhere, especially Europe

* But it’s supply where the real question has to be answered: How much of this weakness on the supply side will turn out to be structural–perhaps contributing to a secular slowdown–and how much is temporary but longer-than-usual-lasting remains a crucial and open question. [Interesting that Larry Summers favourite expression about secular stagnation made its way into his speech!]

1. Labour supply is ‘a source of concern‘ – Although this reduction in labor supply largely reflects demographic factors–such as the aging of the population–participation has fallen more than many observers expected… there are good reasons to believe that some of the surprising weakness in labor force participation reflects still poor cyclical conditions. Many of those who dropped out of the labor force may be discouraged workers.

2. Decline in the rate of Investment –  the growth rate of the capital stock has yet to bounce back appreciably–despite historically low interest rates, access to borrowing for most firms, and ample profits and cash

3. Poor productivity – Possibly we are moving into a period of slower productivity growth–but I for one continue to be amazed at the potential for improving the quality of the lives of most people in the world that the IT explosion has already revealed

* Low interest rates can play their part

the distinction between cyclical and structural is not always clear cut and there are real risks that cyclical slumps can become structural; it may also be possible to reverse or prevent declines from becoming permanent through expansive macroeconomic policies

* But he seems to feel the return of animal spirits could do more

But three things are for sure: first, the rate of growth of productivity is critical to the growth of output per capita; second, the rate of growth of productivity at the frontiers of knowledge is especially difficult to predict; and third, it is unwise to underestimate human ingenuity.

* Great steps have been taken to deliver financial stability (and he lists what the goals of that should be), but he echoes Andy Haldane’s view that the next crisis will likely not manifest itself in the banking sector: Among the most important of the possible unintended consequences is that toughened regulation of banks will move some financial activity out of the banking system and into the shadow banking system.

* QE has been successful and forward guidance ‘can be successful‘ , But the use of these tools–particularly as reflected in the size of central bank balance sheets–will make the conduct of monetary policy more complicated during the recovery.

* When the time comes, he’s clearly in the camp of raising the IOER, as well as using reverse repos: Raising the rate of interest paid on excess reserves should play a central role in the eventual normalization of short-term interest rates. An overnight reverse repo facility could also play a useful part in setting a floor under money market rates.

* Does he clean not lean, like Yellen? Probably…

My answer to that question is that the “flexible” part of flexible inflation targeting should include contributing to financial stability, provided that it aids in the attainment of the main goals of monetary policy.

And, while there may arise situations where monetary policy needs to be used to deal with potential financial instability, I believe that macroprudential policies will become an important complement to our traditional tools.

* Though his experience in Israel suggests that only those macroprudential policies with direct links to the interest rate have the biggest bite

The success of these policies was mixed. The limit of one-third on the share of any housing loan indexed to the short rate substantially raised the cost of housing finance and was the most successful of the measures. Increases in both the LTV and PTI ratios were moderately successful. Increasing capital charges and risk weights appeared to have little impact in practice. 


Schizophrenic #FOMC

How to reconcile these two recent comments from Janet Yellen?

‘Because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical.’ (2 July)

While prices of real estate, equities, and corporate bonds have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms. In some sectors, such as lower-rated corporate debt, valuations appear stretched’ (15 July)

In the first, she argues for cleaning up bubbles afterwards, rather than leaning into them [previously covered here: http://blondemoney.co.uk/2014/07/yellen-cleans-not-leans/]. So why bother in her recent testimony even to try to identify them ahead of time? She just said it wasn’t critical….?

The answer?

  1. The Fed has a new role for financial stability, and is figuring out how to handle that new responsibility. Who would want to cause another crisis so soon after the last one?
  2. The testimony presented the view of the Committee, not just of Janet herself. We know that cracks in the lower-for-longer consensus are emerging on the FOMC, not least because of concerns over the unsustainability of the accompanying lower-for-longer-levels of volatility!

Why does this matter?

It leaves the Fed looking schizophrenic. Either they really are worried about the spillover effects of leaving policy too easy for too long, and try to do something about it; or they consider it something that can be cleaned up afterwards, when the real economy is booming.

To reconcile this puzzle, the key focus remains wage inflation. Only when that turns higher does it appear that Janet will relax enough to take the foot off the free money accelerator.

In July 15th’s Monetary Policy Report, that time is still some far away, it would seem, as this chart demonstrates.wages US