If there was one word Yellen emphasized yesterday it was caution. The dot plot reflected that as well. Can one ask if the Fed is being too cautious?   

Yellen acknowledged that the Fed’s assessment of the US economy had not changed much from December. There is little reason it should. However, it is difficult to reconcile that with the substantial change in the forward guidance, and the halving of the rates hikes that are deemed appropriate this year.  

The US labor market continues to heal. It is not just that the jobs creation remains strong and that the unemployment rate is below 5%, but the underemployment measure (U-6) made new cyclical low last month at 9.7%. The four-week moving average of weekly jobless claims stands at 268k.  In this cycle, it has rarely been lower.   

The labor market is critical for the Fed’s leadership. It is not only a mandate, but it is the key to the Fed’s leadership understanding of inflation.   Headline inflation moves to core and core is driven by wages. 

Core price pressures have risen. Despite the dollar’s rise, which in broad trade-weighted terms peaked in mid-January, and the drop in energy prices, core CPI, and the core PCE deflator rose steadily last year. Yesterday, February CPI was released. The core measure rose 2.3% year-over-year. That is its fastest pace in nearly four years. The core PCE deflator lags behind the core CPI due to methodological and composition reasons. However, it was at 1.7% in January. This is just above the 2014 peak at which time the Fed cautioned that inflation bump was transitory (which it was as the core PCE slipped back toward 1.2% in the middle of last year. 

Inflation expectations have also risen markedly. The five-year breakeven rose from about 95 bp on February 9 to 1.51% today, which is the highest since last July. The 10-year breakeven has risen from 1.2% on February 10 to 1.63% today, a new four-month high.