“I never said most of the things I said.”
When one chairs the most influential central bank in the world, words are everything.
Janet Yellen last week likely tilted higher market expectations for a December liftoff simply by not mentioning one word – China – in her speech, “Inflation Dynamics and Monetary Policy,” after several references to the nation in her dovishly perceived 17 September press conference.
Of course, in her recent speech, Yellen also indicated that she herself (“most of my colleagues and I”) anticipates that it will likely be appropriate to raise rates sometime this year.
Recall that when asked in the press conference about her intentions, she responded that she speaks for the committee rather than herself. Yet, I wouldn’t make too much of this – at press conferences, the chair indeed speaks for the committee, while in speeches she, like other members, can speak for herself (though the chair rarely does so).
Yet, while the messaging regarding a likely December rate hike was clear, though unsurprising, in Yellen’s speech, my read of the footnote-peppered text (and as a nerdish economist, I read all the notes) is a very dovish one. Why? Because the Fed chair repeatedly emphasized the importance of inflation expectations. The trouble is that market-based inflation expectations just plummeted to new lows. To quote, and honor, the recently departed Yogi Berra: “Slump? I ain’t in no slump … I just ain’t hitting.”
True, survey-based expectations have remained relatively stable so far and seem to be “well anchored,” according to Yellen. Yet, she went on to say that “failure to keep inflation under control – by letting it drift either too high or too low for too long – could cause expectations once again to become unmoored.” And the fact is that while the economy certainly ain’t in no slump, the Fed hasn’t been hitting its inflation target for a long, long time. To me, Yellen’s “unmoored” comment is just another way of saying that a December liftoff, while more likely than not at this stage, is not a done deal and that even if it comes, it likely will be the most dovish hike in the Fed’s 102-year history.
Actually, Berra expressed this much better than I can: “You’ve got to be very careful if you don’t know where you are going, because you might not get there.”