Monday, September 22, 2014

Yellen's Spin
Fed Chair Janet Yellen still knows how to sprinkle the fairy dust on the stock market. I’ve noted in the past that ever since she joined the Fed, stock prices usually have moved higher whenever the “Fairy Godmother of the Bull Market” has spoken publicly about monetary policy and the economy.

She first served at the Fed as vice chair of the Board of Governors, taking office in October 2010, when she simultaneously began a 14-year term as a member of the Board that will expire January 31, 2024. Since becoming the Fed chair on February 3, 2014, for a four-year term ending February 3, 2018, her power to charge up the bull has clearly increased. She did it again last week when she spoke at her third press conference as Fed chair after the latest meeting of the FOMC on Wednesday, September 17. The S&P 500 rose 0.6% from the closing price on Tuesday to Thursday’s closing price, hitting yet another new record high of 2011.23.

In my 9/18 Fed Blog post, I discussed Yellen’s “Theory of Relativity.” Here are some additional related points:

(1) The beat goes on. By my count, Yellen has spoken publicly about monetary policy and the economy eight times since assuming the top job at the Fed. The market has rallied every time with one exception, on March 19 when she said at her first press conference that “considerable time” meant about six months. In other words, six months after the projected termination of QE by the end of October, the Fed would start hiking the federal funds rate. That would be April 2015.

(2) Time isn’t measured with a clock. She subsequently backed away from such specific forward guidance. Indeed, during her press conference last week, she reiterated that Fed policy is data dependent, not date dependent: “I know ‘considerable time’ sounds like it's a calendar concept, but it is highly conditional and it's linked to the Committee's assessment of the economy.” As noted in last week’s FOMC statement, as long as the committee judges that “a range of labor market indicators suggests that there remains significant underutilization of labor resources” and that inflation is running below 2.0%-2.5%, Yellen and most of her colleagues are in no rush to raise interest rates.

(3) The “dot plot” is also meaningless. What about the “dot plot” showing the federal funds rate forecasts of all the participants of the FOMC whether they are voting members of the committee or not? The latest one was released along with the FOMC statement last Wednesday. It shows an upward drift from the previous plot released on June 18.

However, as Yellen said at her previous press conferences, the dot plot is as meaningless as “considerable time.” She reiterated that Fed policy is data dependent, suggesting that the forecasts are just a game they play on the FOMC. At her latest press conference, Yellen said over and over again that there is a lot of uncertainty about the Fed’s forecasts, even over the next few quarters, so just ignore the FOMC’s median forecast for where the fed funds rate will be at the end of 2017.

She first minimized the importance of the dot plot at her first press conference as Fed chair on March 19: “But, more generally, I think that one should not look to the dot plot, so to speak, as the primary way in which the Committee wants to or is speaking about policy to the public at large.” She did it again at her second press conference on June 18: “And around each of those dots, I think every participant who’s filling out that questionnaire has a considerable band of uncertainty around their own individual forecast.”

(4) Back to “measured” pace of rate hikes? The FOMC raised the federal funds rate by 25bps at every meeting during the “measured” pace of tightening under Fed Chair Alan Greenspan from May 4, 2004 through December 13, 2006. Last Wednesday, the WSJ MarketWatch posted an interesting analysis of the latest dot plot, showing that it implied rate hikes at every meeting once the Fed starts raising rates again.
(Based on an excerpt from YRI Morning Briefing)

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