July 16

Yellen’s Subtle Shift

With the entire market standing around waiting for some totally obvious FOMC shift in forward guidance, Janet Yellen may have subtly delivered that change this morning. The Fed Chief’s semi annual testimony today was a long and arduous  rehashing of current Fed policies without much noticeable change in content. As I tuned in today two things stood out to me. The new passage including the word ‘continues’, as well as the Chairwoman’s tone being more positive. The FT and WSJ both cherry picked out the passage below as significant:

“If the labour market continues to improve more quickly than anticipated by the committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned,” Ms Yellen said.

The word ‘continues’ implies that the current pace of job creation is at or above the threshold for the Fed to slowly move towards a less accommodative policy. The 6 month non farm payrolls average is  225k while the 3 month average is 264k. The unemployment rate has fallen from 6.7% down to 6.1% since March. JOLTS jobs openings, one of Yellens favorite indicators, also shows a significant pick up in the last 3 months. Her remarks were also noticeably void of her usual mentions of inflation being below target, these comments were the norm in Q1 of this year.

The  Chairwoman subtly acknowledged these improvements as her overall tone was slightly more positive on labor market growth as well as inflation. She remained downbeat on housing, but last month’s numbers in that sector were very strong and if continued could douse the Fed’s bearishness.

Much has been made today of the prepared remarks saying that some small social media and biotech companies have ‘stretched’ valuations, but I see the main meat of this communication being the paragraph above. It seems best to proceed with the mindset that if the status quo continues the Fed will move towards tightening.