Monday, June 6, 2016

Janet Yellen Said Nothing, Perfectly

From Matt Phillips at Quartz:

Janet Yellen just said nothing perfectly
When you’re a central banker, sometimes it’s your job to stand up before the world’s financial markets and deliver a statement that conveys almost no new information.

Today is one of those days for Fed Chair Janet Yellen. Investors awaited her speech in Philadelphia this afternoon hoping that she would tell them how she was changing her views on the economy in light of the truly ugly jobs report for May. The report Friday morning showed just 38,000 jobs were created last month, far below expectations of about 160,000, and much lower than the roughly 200,000 monthly pace over the last year or so.

The disappointing report scrambled well-established expectations that the Fed would lift interest rates for the second time since the financial crisis on June 15, when they release their next policy pronouncement. Before the jobs report, May traders in the futures markets put the odds of a June 15 rate increase at roughly 33%. That tumbled to 4% immediately after the May report, according to the Wall Street Journal.

Did futures markets get that right? Yes. Pretty much. In her speech today Yellen seemed intent on not offering any new information suggesting she wants to raise rates in June. Here’s the core of the speech:
Although this recent labor market report was, on balance, concerning, let me emphasize that one should never attach too much significance to any single monthly report. Other timely indicators from the labor market have been more positive. For example, the number of people filing new claims for unemployment insurance–which can be a good early indicator of changes in labor market conditions–remains quite low, and the public’s perceptions of the health of the labor market, as reported in various consumer surveys, remain positive.
Translation: “Yes, we saw the ugly report on Friday the same as you. Other economic data hasn’t confirmed it, don’t know which reports are right, so we’ll have to just wait and see.”

See also Across the Curve:

Dissecting Yellen
Via Stephen Stanley at Amherst Pierpont Securities:
Chair Yellen took a relatively upbeat tone in her speech today.  In fact, to reprise an analogy that I used to analyze her last speech in late March, she characterized the growth, employment, and inflation “glasses” as mostly full, albeit with an appropriately sober approach reflecting her dovish and nervous bent.  My interpretation is that she still believes the economy is on track to dictate a couple of rate hikes this year (though, of course, she was not that specific), as long as the data come in as she expects.  Of course, as we saw last Friday, there are frequently surprises in the data, so she failed to provide any specifics regarding her opinion about when the Fed will next hike rates.  In my view, the FOMC wants to move as soon as the data justify it.  My reaction to this speech is that it supports my view that the FOMC will move in July (assuming that the data cooperate of course), and I would interpret today’s speech as the first step in a process of laying the groundwork for such a move.  To make a July rate hike happen, I think the two biggest things we will need to see are: 1) a bounceback in June payrolls (released July 8), as a reassurance that labor markets remain healthy and 2) Q2 GDP tracking estimates remaining above trend (anything with a 2-handle will do) after Q1’s disappointing growth.  Any additional firming on the wage and/or price fronts would further bolster the case for a rate hike sooner rather than later.

As I noted above, I thought that she took a pretty optimistic tone on a number of key economic questions.

Labor markets: First, she downplayed the May employment report, arguing that “one should never attach too much significance to any single monthly report.”  She pointed out that a number of other indicators “remain positive.”  She noted that wages are “finally…picking up.”  Most strikingly, she argued that “I believe we are now close to eliminating the slack that has weighed on the labor market since the recession,” which is by far the most upbeat assessment she has given on labor market slack in this expansion....MORE