Several Fed President’s gave speeches last week.But the speeches offered by St. Louis President Bullard and Chicago Fed President Evans highlight the different perspectives held by the members of the open market committee.St. Louis President Bullard framed his discussion of the economy through the prism of “five questions,” for which he provided the italicized answers:

  • What are the chances of a hard landing in China? The probability of a hard landing in China is no higher today than it was earlier this year.
  • Have U.S. financial market stress indicators worsened substantially?Financial stress today in the U.S. is not particularly high compared to the last five years.
  • Has the U.S. labor market returned to normal? U.S. labor markets have largely normalized.
  • What will the headline inflation rate be once the effects of the oil price shock dissipate? Oil price stabilization likely implies headline inflation will return to 2 percent in the U.S.
  • Will the U.S. dollar continue to gain value against rival currencies? Global policy divergence has already been priced into foreign exchange valuations.  

    • Bullard’s analysis is somewhat superficial as there are strong rebuttals to several conclusions.Financial stress may be increasing for two interrelated reasons.First, as a result of Dodd-Frank, financial intermediaries are no longer inventorying corporate bonds, instead acting as brokers between buyers and sellers.This could be a problem if the market experiences a liquidity event.  And the market may be closer to just that problem.CCC yields widened considerably over the last year, thanks to weakness in the oil sector.  if the market experiences a liquidity event. :

    The Moody’s Baa index is just shy of the peak of 5.58 per cent in August 2013 near the end of the “taper tantrum”, when yields rose sharply as investors anticipated that the Fed would start winding down its asset purchases.  

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