As I noted in my 9/30 Fed Blog post, FRB-Chicago President Charles Evans told CNBC on Monday that he believes it would be "quite some time" before it's appropriate to start tightening. Evans sees June as a possibility for the first rate increase, but said on CNBC’s Squawk Box that if it were his decision, he'd wait even longer. “If you look at the risks, we ought to balance those and be concerned that sometimes coming out of zero [rates] ... is really a difficult proposition for the economies. And so I'd like to be patient.”

I predicted that there might be more tightening tantrums ahead if investors share Evans’ concerns that the economy might go wobbly on the first rate hike. Most economists believe that once the Fed starts raising rates, that will be a sure sign that the economy has finally achieved the long hoped-for “escape velocity,” which should be bullish for stocks.

Why might a small initial increase in the federal funds rate turn into a serious problem for the economy and the stock market? For starters, it could send the dollar to the moon. That would depress the dollar value of corporate profits earned abroad. It would also depress exports and boost imports.

A more disturbing scenario would be a collapse of the corporate bond market. Investors have been piling into the market as they’ve been reaching for yield. Corporations have responded by issuing bonds at a record pace. Data compiled by the Fed show that nonfinancial corporations (NFCs) raised a record $741 billion in the bond market over the past 12 months through July. A significant portion of those funds were used to refinance outstanding debt at lower yields. The Fed’s Flow of Funds data show that net issuance by NFCs totaled $287 billion over the past four quarters through Q2.

On Tuesday, the WSJposted an article titled, “Corporate Bond Sales Coming at Blockbuster Pace.” Here’s the main finding:

Bond sales from highly rated companies in the U.S. clocked a record pace through the third quarter, as companies took advantage of low rates and investors sought out securities that pay more interest than low-yielding government bonds.

Highly rated firms sold about $913 billion of bonds in the U.S. in the first nine months of 2014, up from $869 billion last year, according to Dealogic's figures, which go back to 1995. That puts the investment-grade U.S. market on pace to beat last year's record issuance of about $1.1 trillion, according to Dealogic.

On Monday, the WSJ posted a similar article about the European bond market titled, “Europe’s Corporate Borrowing Set to Hit Pre-Crisis Peak.” Emerging market borrowers have also been raising plenty of money in the global bond markets.

Lots of those bonds have been purchased by retail and institutional investors, some of whom might try to sell them when the Fed starts actually raising interest rates. The problem is that the corporate bond market tends to be illiquid on a good day. This could be a nightmare scenario for bond funds if they are faced with lots of redemption orders with few buyers for their bond holdings. During July, there was a record $3.6 trillion in bond funds and ETFs.

Blackrock, the world’s largest money manager, is concerned. That’s according to a 9/22 Bloomberg story titled, “BlackRock Urges Changes in ‘Broken’ Corporate Bond Market.” Here’s the main point:

Banks have retained their stranglehold on corporate debt trading despite years of effort by BlackRock and other large investors to eliminate their oligopoly. The top 10 dealers control more than 90 percent of trading, according to a Sept. 15 report from research firm Greenwich Associates. To BlackRock, the dangers of price gaps and scant liquidity have been masked in a benign, low interest-rate environment, and need to be addressed before market stress returns.

If a minor initial Fed rate hike does destabilize global bond markets, then there probably won’t be a second rate hike. That would seriously damage the credibility of the Fed, where the official party line has been that exiting ultra-easy monetary policy won’t be a problem.

(Based on an excerpt from YRI Morning Briefing)

Will there be life after QE? The Fed is scheduled to terminate this program at the end of October. There’s no doubt that investors are starting to fret about what comes after QE. They realize that once QE is terminated, all the focus will be on when the Fed will start raising interest rates. So recent comments on this subject by members of the “Federal Open Mouth Committee” seem to be having more impact on daily trading, contributing to the market’s volatility. Consider the following:

(1) Richard Fisher is a retiring hawk. Last Thursday’s 1.6% drop in the S&P 500 was widely attributed to FRB-Dallas President Richard Fisher's warning that interest rates may rise “sooner rather than later.” Of course, he is widely known as a hawk. In fact, he dissented at the last meeting of the FOMC according to the official statement: “President Fisher believed that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee's stated forward guidance.”

Fisher said the Fed might start raising rates around the spring of 2015. He won’t be a voting member of the FOMC next year. Actually, he recently announced that he plans to retire next year. In the past, his comments have never had much if any impact on the markets since the Fed’s hawks have been consistently outnumbered by the doves.

(2) Charles Evans is an influential dove. On the other hand, FRB-Chicago President Charles Evans yesterday told CNBC that he believes it would be "quite some time" before it's appropriate to start tightening. Evans is one of the Fed's dovish regional chiefs. While not a voting member on the central bank's policymaking committee this year, he's a 2014 alternate and will be voting next year. He has been an influential dove, convincing the FOMC to tie policy to the unemployment rate in late 2012.

Evans sees June as a possibility for the first rate increase, but said on CNBC’s Squawk Box that if it were his decision, he'd wait even longer. “If you look at the risks, we ought to balance those and be concerned that sometimes coming out of zero [rates] ... is really a difficult proposition for the economies. And so I'd like to be patient.”

(3) James Bullard is a bellwether. Last Tuesday, FRB-SL President James Bullard said that, at the next meeting of the FOMC on October 28-29 (after QE has been terminated), the Fed may need to drop its “considerable time” pledge for when interest rates will rise. He said, “I would like to get the committee to move to something that is more data dependent.” Bullard won’t have a vote on policy until 2016. Nevertheless, an article in Bloomberg recently described him “as a bellwether because his views have sometimes foreshadowed policy changes.”

(4) William Dudley is watching the dollar. Last Wednesday, Bloomberg’s Simon Kennedy reported:

As Federal Reserve Bank of New York president, [William] Dudley is the only regional Fed chief with a permanent vote on policy and is the central bank’s eyes and ears on Wall Street. So when Dudley says something new it’s worth tuning in. And this week he became the first Fed official to comment on the U.S. dollar since the Bloomberg Dollar Spot Index touched its highest level on a closing basis since June 2010.

“If the dollar were to strengthen a lot, it would have consequences for growth," the 61-year-old Dudley, a former Goldman Sachs Group Inc. economist, said at the Bloomberg Markets Most Influential Summit in New York. "We would have poorer trade performance, less exports, more imports,” he said. "And if the dollar were to appreciate a lot, it would tend to dampen inflation. So it would make it harder to achieve our two objectives. So obviously we would take that into account."

The JP Morgan trade-weighted dollar jumped 1% last week to the highest reading since June 7, 2010.

5) “Tightening tantrums” ahead. All this means that we can look forward to spending October wondering (as we did before the September 16-17 meeting of the FOMC) whether “considerable time” will be dropped from the next statement. It probably will be deleted from the Fed’s boilerplate message. In any event, we can expect more “tightening tantrums” ahead. The stock market may be just as freaked out as Evans is by the notion that the economy might go wobbly on the first rate hike.

(Based on an excerpt from YRI Morning Briefing)

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)

The Fed is in no rush to raise interest rates sooner than Fed watchers expect. Most of them expect the Fed to start doing so next year either in the spring or early summer. So yesterday’s statement retained the “considerable time” language that has been in the FOMC statements since the September 12-13, 2012 meeting of the committee. Back then, the specific sentence stated:

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.

This sentence was tweaked in the December 12, 2012 statement as follows:

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends.

That program will end at the next meeting on October 28-29. Most Fed watchers seem to believe that six to nine months is a considerable time, which would mean that the first rate hike should be during either April, May, June, or July of next year.

As widely expected, during her press conference, Fed Chair Janet Yellen reiterated that there is room for improvement in the labor market. She noted that while inflation has risen in recent months, it remains below the Fed’s target. Fed policy remains data dependent, which means that the normalization of monetary policy will depend on the performance of the economy. So once the Fed starts raising interest rates, it could happen at a slow pace or at a fast pace.

On balance, there were no surprises yesterday other than for those of us who thought there was a chance that “considerable time” would be dropped. Clearly, Yellen is solidly in charge of FOMC policymaking, and she is among the most dovish members of the committee. In any event, during the Q&A session of the press conference, Yellen said that “considerable time” has nothing to do with time. She stressed that Fed policy is data dependent. So the Fed will hike rates when the data say it’s time to do so, not when the clock says so. In other words, “considerable time” is basically meaningless. Got that?

The Fed will maintain ultra-easy monetary policy as long as the economy needs it, which will depend on the FOMC’s assessment of the incoming data.

(Based on an excerpt from YRI Morning Briefing)

Central bankers like to get together on a regular basis at nice locales. They do so every year in late August at Jackson Hole, Wyoming. This annual conference brings together the top honchos of the major central banks. They tend to focus their discussions on the hot issues of the day. This year’s topic is “Re-Evaluating Labor Market Dynamics.” The program for the August 21-23 meeting will be posted today at 6 p.m., MT. Last year’s topic was “Global Dimensions of Unconventional Monetary Policy.”

On Wednesday, Bloomberg’s Simon Kennedy reported:

Every time then-Federal Reserve Chairman Ben S. Bernanke spoke at the annual monetary policy symposium in the shadow of Wyoming’s Teton mountains since 2007, stocks rallied. With Janet Yellen set to make her first speech to the conference as central bank chief on Aug. 22, investors may be setting themselves up for a fall, according to Steven Englander, global head of G-10 foreign exchange strategy at Citigroup Inc.

Kennedy noted that from 2007 to 2012, Fed Chair Ben Bernanke’s keynote speech was bullish, with the S&P 500 up an average 1.3% that day. Bernanke skipped last year’s meeting. Englander was quoted as saying that Fed Chair Janet Yellen’s speech could be a letdown: “We worry that dovishness is increasingly anticipated and that by the time we get to her talk anything less than ‘full dovishness’ will be a disappointment.”

I’m not worried. As I noted yesterday, I expect that the “Fairy Godmother of the Bull Market” won’t let us down. In a June 30, 2009 speech, Yellen said that the lesson of history, particularly of the Great Depression, is that premature monetary tightening can be disastrous. I’m sure she still thinks so, and might very well say so again on Friday.

Yellen is a Yale PhD macroeconomist with particular interest in the labor market. She is also a liberal and believes that the labor market needs all the help it can get from the Fed. I doubt that she picked the topic for discussion at Jackson Hole, but I’m sure the folks at the Kansas City Fed, which has been hosting the conference since 1978, did so to please the boss.

Yellen’s liberal bias was plain to see in the statement issued after the July 30 meeting of the FOMC. It noted: “Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources.” The previous statement following the June 18 meeting noted: “Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated.” This change in wording clearly reflects Yellen’s focus on the negatives rather than the positives in the labor markets.

I believe that American consumers are in better shape than Yellen believes. However, if she insists on helping them out with more ultra-easy money than they really need, then stock investors will continue to benefit as well. Again: Thank you, Fairy Godmother!

ECB President Mario Draghi will follow Yellen with the keynote luncheon address on Friday. It’s unlikely that he will drop any new “whatever-it-takes” bombshells, as he did on July 26, 2012. It’s unlikely that he will hint at the possibility of a Fed-style quantitative easing given the legal issues surrounding this program. Instead, he will most likely stress that the ECB’s recent easing moves, including TLTRO lending to the banks starting next month, should help to revive growth in the Eurozone. Unlike Yellen, he is likely to say that monetary policy can’t fix all of our problems, including structural ones in the labor market.

(Based on an excerpt from YRI Morning Briefing)

Investors may be looking forward to Fed Chair Janet Yellen’s speech at Jackson Hole on Friday. I’ve often affectionately called her the “Fairy Godmother of the Bull Market.” Stock prices tend to rise after she speaks about the economy and monetary policy. That happened often when she was a Fed governor, and has continued now that she is Fed chair.

A few Fed watchers are speculating that the upcoming speech would be a good opportunity for Yellen to signal that she is ready to normalize monetary policy, i.e., hike the federal funds rate. So they are expecting a hawkish speech. I disagree. In a June 30, 2009 speech, Yellen said that the lesson of history, particularly of the Great Depression, is that premature monetary tightening can be disastrous:

If anything, I’m more concerned that we will be tempted to tighten policy too soon, thereby aborting recovery. That’s just what happened in 1936 when, following two years of robust recovery, the Fed tightened policy because it was worried about large quantities of excess reserves in the banking system. The result? In 1937, the economy plunged back into a deep recession. Japan too learned that hard lesson in the 1990s, when both monetary and fiscal policies were tightened in the mistaken belief that the economy was rebounding.

These episodes teach us a valuable lesson that we should heed in the present situation. Let this not be another 1937, but a time when policymakers have the wisdom and patience to nurse the economy back to health. And, when the economy does come back, let it be built on a foundation of sound private investment and sustainable public policies. Only then can we be confident that we can escape destructive boom-and-bust cycles and build a more permanent prosperity. Thank you very much.

Thank you, Fairy Godmother!

(Based on an excerpt from YRI Morning Briefing)

Fed Chair Janet Yellen is no slacker. She is a hard worker for sure. You’ll never see a photo of her at the golf course. She would like everyone who wants a job, and wants to work hard, to have the opportunity. She intends to keep interest rates near zero for as long as necessary to do the job. The economy seems to be moving faster toward Yellen’s goal of eliminating slack in the labor market. June’s JOLTS report and July’s NFIB survey of small business owners, which were both released yesterday, certainly confirm this assessment.

Of course, Fed Chair Janet Yellen has said that she won’t be completely satisfied with the progress in the labor market unless wages are rising at a faster pace. That’s not happening so far. During her March 19 press conference, she said:

The final thing I’d mention is wages, and wage growth has really been very low. …. In fact, with the productivity growth we have and 2 percent inflation, one would probably expect to see, on an ongoing basis, something between--perhaps 3 and 4 percent wage inflation would be normal. Wage inflation has been running at 2 percent. So not only is it depressed, signaling weakness in the labor market, but it is certainly not flashing.

Back in July, I suggested that Yellen should read a very interesting 7/21 article posted on Bloomberg titled, “Yellen Wage Gauges Blurred by Boomer-Millennial Shift.” The conclusion is that demographic shifts in the labor markets may keep a lid on wage inflation, which would make it a poor indicator of labor market conditions:

As today’s middle-aged Americans grow older, they are leaving their prime working years behind, trading big salaries for part-time gigs or retirement, just as an even larger group of young people come into the labor force at entry-level salaries. The seismic shift may be one reason behind the sub-par wage growth that Yellen says still shows ‘significant slack’ in the job market.

I concluded then, as I still believe:

If she continues to put too much weight on this demographically flawed indicator, monetary policy may stay too easy for too long (as it has already, in my opinion). What’s wrong with that if wage inflation remains subdued, and so does price inflation? Nothing really, I suppose, unless it all leads to lots more financial bubbles that should have been averted with the more immediate normalization of monetary policy.

(Based on an excerpt from YRI Morning Briefing)

Bubbles are in fashion. On Tuesday, when she testified before the Senate Banking Committee, Fed Chair Janet Yellen wore a stylish outfit with a jacket that was grayish looking with lots of white circles. That was a fitting choice since they looked like bubbles, which was a topic covered during her semi-annual congressional testimony on monetary policy. Let’s review the testimony:

(1) Prepared remarks. In her prepared remarks, Yellen said that the FOMC “recognizes that low interest rates may provide incentives for some investors to ‘reach for yield,’ and those actions could increase vulnerabilities in the financial system to adverse events.” She pinpointed the junk bond market, where “valuations appear stretched and issuance has been brisk.” The Fed is also monitoring the leveraged loan market and working on supervising it effectively. On the other hand, she doesn’t see much irrational exuberance in the prices of real estate, equities, and corporate bonds. While they “have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms.”

(2) The report. The Fed’s latest Monetary Policy Report accompanied Yellen’s testimony. The word “stretched” is in fashion. It appeared twice in the report to describe valuations in some asset markets, “particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year.”

The report also downplayed any irrational exuberance in the rest of the equity market: “However, valuation measures for the overall market in early July were generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities.”

What about other asset classes? “Beyond equities, risk spreads for corporate bonds have narrowed and yields have reached all-time lows. Issuance of speculative-grade corporate bonds and leveraged loans has been very robust, and underwriting standards have loosened.”

(3) Q&A. During the Q&A session, Senator Tom Coburn (R-OK) framed his question as follows: “Rather than preventing asset bubbles from happening, we're now taking the approach that they're going to happen and we're going to deal with them. It just seems to me now that we're kind of locked in this zero interest rate phenomenon, and one of the consequences of that is reaching for yield, and now we're going to try to attenuate the response to the zero interest rate rather than change the policy so we don't have the bubbles in the first place.”

Yellen responded by expressing confidence in the Fed’s macroprudential tools: “They diminish the odds that bubbles will develop.” However, she did concede, “So I think there are some risks in a low interest rate environment. I've indicated that, and we're aware of them. But I think the improvements we've put in place in terms of regulation both diminishes the odds that risk will develop and, if there is an asset bubble and it bursts, it will--it will, and we're not going to be able to catch every asset bubble or everything that develops.” Her comment raises an interesting question: Might there be too many bubbles to catch?

There was no discussion in either the testimony or the report, nor during the Q&A, of what might happen when the Fed finally starts raising rates. Last year’s “taper tantrum” triggered a mini crisis in emerging market currencies, debt, and stocks. When the Fed starts hiking rates, that could happen again. Another worrisome development under this scenario would be massive withdrawals from corporate bond mutual funds, which have become a large “shadow bank.” That would be particularly troublesome since the corporate bond market has become increasingly illiquid since the Great Financial Crisis.

The biggest bubble of them all, of course, is in government debt around the world. All the more reason why the Fed and other central banks might be very hesitant to raise interest rates. They’ve been getting away with their NZIRPs (near-zero interest rate policies) because CPI inflation rates have remained surprisingly low. That might actually be attributable to ultra-easy money, which has financed too much excess capacity, particularly in China. However, there has certainly been lots of asset inflation (a.k.a. bubbles), and probably more to come.

In her prepared remarks, Yellen was a two-handed economist about the outlook for interest rates. If the labor market continues to improve faster than expected, “then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned.” On the other hand, if economic activity is disappointing, “then the future path of interest rates likely would be more accommodative than currently anticipated.”

During the Q&A, she clearly favored erring on the ultra-easy side of the street. “The Federal Reserve does need to be quite cautious with respect to monetary policy.” She warned about the “false dawns” that tricked Fed officials in recent years. Later, Yellen told lawmakers that “accommodative policy” would be necessary until the economic headwinds that have slowed the recovery are “completely gone.” She didn't explain how she will determine that to be the case.

(Based on an excerpt from YRI Morning Briefing)

Yesterday, Fed Chair Janet Yellen presented the Fed’s semi-annual Monetary Policy Report to the Senate Banking Committee. While the accompanying testimonies of Fed chairs always make headlines, the report is rarely even read. Not so the latest one, which provided the following investment advice: “Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched, with ratios of prices to forward earnings remaining high relative to historical norms.” In other words, sell them.

That unnerved stock investors despite the following reassurance in the report about the overall market: “However, valuation measures for the overall market in early July were generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities.”

Yellen was also reassuringly dovish, stating: “Although the economy continues to improve, the recovery is not yet complete.” Despite all the recent strength in lots of labor market indicators, she claimed that “significant slack remains in labor markets.” She said that this is “corroborated by the continued slow pace of growth in most measures of hourly compensation.” In the past, she indicated that she would like to see wage inflation rise from 2% currently to 3%-4%.

The 7/21 issue of The New Yorker includes a lengthy article about Yellen that’s worth reading. It confirms that she is an impassioned liberal: “Yellen is notable not only for being the first female Fed chair but also for being the most liberal since Marriner Eccles, who held the job during the Roosevelt and Truman Administrations. Ordinarily, the Fed’s role is to engender a sense of calm in the eternally jittery financial markets, not to crusade against urban poverty.”

Yellen is from the Fed, and here “to help American families who are struggling in the aftermath of the Great Recession.” She and her husband, who leans far to the left, have published a series of papers on why labor markets don’t automatically work to maintain full employment. The government can do the job better: "I come from an intellectual tradition where public policy is important, it can make a positive contribution, it’s our social obligation to do this. We can help to make the world a better place.”

(Based on an excerpt from YRI Morning Briefing)

The Fairy Godmother of the Bull market did it again last week. Whenever Janet Yellen speaks publicly about monetary policy and the economy, stock prices tend to rise. On Wednesday, the S&P 500 climbed 0.8% to yet another new record high in response to her press conference that day. It rose 0.3% on Thursday and Friday to 1962.87. It would have to gain just 2.6% to reach my yearend target of 2014, which I am thinking about raising. However, a melt-up followed by a meltdown back to 2014 by the end of this year remains a distinct possibility.

Yellen’s pronouncements have tended to be bullish for stocks since she first took office as vice chair of the Board of Governors in October 2010. Now we can look forward to her quarterly press conferences as Fed chair, the position she assumed in February of this year. Of course, Fed policy has been ultra-easy since the start of the bull market, and stocks have also tended to rise after most FOMC meetings.

The stock market’s bulls were charged up last week by both the FOMC’s statement and Yellen’s spin on monetary policy. Consider the following:

(1) Unanimous. The latest statement was almost identical to the previous one on April 30. (See the WSJ’s Fed Statement Tracker.) Once again, the FOMC reaffirmed its NZIRP, or near-zero interest-rate policy:

The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, 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.

Remarkably, the vote for the current policy stance was unanimous. No one dissented in favor of language suggesting that interest rates might have to be raised sooner given the ongoing improvement in the economy and the labor markets, as well as the recent rebound in inflation.

(2) Noisy inflation. Even more remarkable, when asked in her press conference about the recent inflation rebound, Yellen blew it off as noise. In her prepared remarks, she didn’t even acknowledge the recent broad-based upturn in inflation:

Inflation has continued to run below the Committee’s 2 percent objective, and the Committee remains mindful that inflation running persistently below its objective could pose risks to economic performance.

Last week, I noted that the core CPI, on an annualized three-month basis, rose from 1.4% during February to 1.8% during March to 2.2% during April to 2.8% during May. I expected some mention of this new inflation risk in the FOMC statement and Yellen’s press conference. Instead, it was like it never happened.

Indeed, Yellen’s response to the first question by CNBC’s Steve Liesman about the possibility that inflation might be on the verge of exceeding the FOMC’s 2016 target was bizarre:

So, I think recent readings on, for example, the CPI index have been a bit on the high side, but I think it's--the data that we're seeing is noisy. I think it's important to remember that broadly speaking, inflation is evolving in line with the committee's expectations. The committee has expected a gradual return in inflation toward its 2 percent objective. And I think the recent evidence we have seen, abstracting from the noise, suggests that we are moving back gradually over time toward our 2 percent objective and I see things roughly in line with where we expected inflation to be.

(3) Unemployment spin. In her prepared remarks, Yellen acknowledged that the labor market is improving, but accentuated the negatives rather than the positives:

The unemployment rate, at 6.3 percent, is four-tenths lower than at the time of our March meeting, and the broader U-6 measure--which includes marginally attached workers and those working part time but preferring full-time work--has fallen by a similar amount. Even given these declines, however, unemployment remains elevated, and a broader assessment of indicators suggests that underutilization in the labor market remains significant.

During the Q&A, Yellen added:

That said, many of my colleagues and I would see a portion of the decline in the unemployment rate as perhaps not representing a diminution of slack in the labor market. We have seen labor force participation rate decline.

She also noted that wage inflation is running around 2%, which is too low in her opinion. It’s barely keeping up with inflation and should be rising faster to reflect productivity. She is rooting for this to happen, and isn’t inclined to tighten monetary policy if and when it does.

(4) No thresholds. The Fed’s experiment with tying monetary policy to a specific threshold for two key indicators started at the December 11-12, 2012 meeting of the FOMC, when an unemployment rate of 6.5% was specified as the “threshold” for discussing raising interest rates as long as the inflation rate wasn’t still below 2%. The unemployment threshold was dropped at the March 18-19, 2014 meeting, the first one with Yellen as chair.

At her latest press conference, Yellen said that the FOMC has reverted to a fuzzier data-dependent approach:

In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This broad assessment will not hinge on any one or two indicators, but will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.

(5) No bubbles yet. Yellen said she sees some signs of speculative excesses, and she is monitoring the low pace of volatility in financial markets, a sign of complacency. However, so far, she doesn’t see a need for monetary policy to respond to these developments, thereby contributing to the markets’ complacency!

Here is what she had to say about volatility:

The FOMC has no target for what the right level of volatility should be. But to the extent that low levels of volatility may induce risk-taking behavior that for example entails excessive buildup in leverage or maturity extension, things that can pose risks to financial stability later on, that is a concern to me and to the committee.

More specifically, she believes that the level of risk-taking remains “moderate”:

Trends in leverage lending in the underwriting standards there, diminished risk spreads in lower-grade corporate bonds, high-yield bonds have certainly caught our attention. There is some evidence of reach for yield behavior. That's one of the reasons I mentioned that this environment of low volatility is very much on my radar screen and would be a concern to me if it prompted an increase in leverage or other kinds of risk-taking behavior that could unwind in a sharp way and provoke a sharp, for example, jump in interest rates. …But broadly speaking, if the question is: To what extent is monetary policy at this time being driven by financial stability concerns? I would say that--well, I would never take off the table that monetary policy should--could in some circumstances respond. I don't see them shaping monetary policy in an important way right now. I don't see a broad-based increase in leverage, rapid increase in credit growth or maturity transformation, the kinds of broad trends that would suggest to me that the level of financial stability risks has risen above a moderate level.

(6) Complacent valuations. With regards to stock market valuations, she remains relatively complacent:

So I don't have a sense--the committee doesn't try to gauge what is the right level of equity prices. But we do certainly monitor a number of different metrics that give us a feeling for where valuations are relative to things like earnings or dividends, and look at where these metrics stand in comparison with previous history to get a sense of whether or not we're moving to valuation levels that are outside of historical norms, and I still don't see that. I still don't see that for equity prices broadly.

(7) Uber dove. Fed policy remains data dependent. However, Yellen is likely to describe the data as “noisy,” and therefore irrelevant if the numbers don’t support her ultra-liberal assessment of the disappointing performance of the economy and her preference for maintaining ultra-easy monetary policy until all ex-cons are gainfully employed. I wish I was kidding.

In her 3/31 speech in Chicago, she briefly described the struggle of three workers in the Windy City--Dorine Poole, Jermaine Brownlee, and Vicki Lira--in the labor market. On April Fools’ Day, Jon Hilsenrath reported in the WSJ:

One person cited as an example of the hurdles faced by the long-term unemployed had a two-decade-old theft conviction. Another mentioned as an example of someone whose wages have dropped since the recession had a past drug conviction.

Hilsenrath also noted that a Fed spokeswoman said Yellen knew of the people's criminal backgrounds and that they were “very forthright” about it in conversations with the chairwoman before the speech!

During last week’s Q&A, Yellen confirmed that she remains one of the FOMC’s most dovish members when she said, “inflation continues to run well below our objective, and we're still some ways away from maximum employment and for the moment, I don't see any tradeoff whatsoever in achieving our two objectives. They both call for the same policy, namely a highly accommodative monetary policy.”

Thank you, Madam Fairy Godmother! Fairy tales can come true, especially for us bulls.

(Based on an excerpt from YRI Morning Briefing)