Janet Yellen gave testimony to Congress today which caused equity, bond and gold futures to all rally. Although her comments were more dovish than many expected, it’s hard to put much faith in them longer term when her job is clearly on the line. The main points were these: Yellen does not expect rates will have to rise by too much to reach neutral; FOMC will gradually reduce its balance sheet; Recent inflation weakness is partly due to a few unusual price categories. There is much ambiguity in many of her statements and lots of room for the Fed to maneuver. What was made abundantly clear was her take on Inflation, and that it’s running below goal.
The market translated Yellen’s testimony as bullish with the belief the Fed is promoting ‘lower rates, and US dollar, for longer’. But that may only be as ‘transitory’ as inflation rates. Let’s look back before we look forward for a sign from the Fed, and their coordinated central banking partners, to better help time a market top. I’m not the only one who believes Central Banks will affect policies that are equity and bond bearish. The difference may be in what confirmation I seek before having the conviction to say the market is in the late stages of a blow-off top.
Macro Notes from Fed Meeting Thursday, June 15, 2017
The Fed raised its target for the federal funds rate by 0.25% (to a range of 1.00% to 1.25%). The move had largely been priced into financial markets. It was the fourth rate hike since December 2015. The market pulled back the prior three rate hikes but is trading basically flat since so the “three rates and a stumble” adage hasn’t worked out so far.
The Federal Open Market Committee’s (FOMC) statement was more hawkish than many expected, particularly given weak inflation reading the day before, which signaled slowest growth since 2004 (a sign of disinflation).
The median (dot plots) interest rate projections (1.4% end 2017 and 2.1% end 2018) suggests one more hike this year with possibility of three more hikes next year. The Fed has a recent history of projecting higher rates than talking them back, or more noteworthy, they have a history of raising short-term rates but longer duration rates fall.
Fed reduced its projection for core personal consumption expenditures inflation (CPCE) from 1.9% to 1.7% in 2017 but raised gross domestic product (GDP) projections from 2.1% to 2.2% for 2017 and lowered the projection for the unemployment rate from 4.5% to 4.3%. Basically that means inflation is disappointing, growth is anemic and unemployment looks great on the surface but participation rate is horrid.
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