Yesterday Fed Chair Janet Yellen spoke about the outlook for monetary policy and her current read on the US economy, together with the risks that the Fed perceive over the coming period. This speech had been keenly awaited for by market participants as these were the first comments since last Friday’s very disappointing non-farm payrolls data.
Europe, China and oil prices were mentioned as well as domestic factors such as US productivity and incomes. “The uncertainties are sizable, and progress towards our goals and, by implication, the appropriate stance of monetary policy will depend on how these uncertainties evolve.”
Broadly, ten days ago at Harvard, Yellen had said that a rate hike might be appropriate in the coming months, yesterday any reference to the timing of a further hike was removed. As a consequence this morning the market is making a 2% probability for a June 15th hike, 22% for a July hike and 42% for a September rate rise. “Further gradual increases in the federal funds rate will probably be appropriate” she said, adding “However, I will emphasize that monetary policy is not on a preset course and significant shifts in the outlook for the economy would necessitate corresponding shifts in the appropriate path of policy.”
Two of Yellen’s colleagues were also on the wires yesterday, Atlanta Fed President Lockhart, who is thought of as middle of the road sort of chap, said that he doesn’t personally see a lot of cost to being patient at the July meeting adding “I think we can be watchful and see how things develop.” While Boston Fed President Rosengren, usually a dove, said that the latest jobs report was disappointing and that “it will be important to see whether the weakness in this report is an anomaly or reflects a broader slowing in labour markets.”
We feel the Fed is still on a path to further tightening and that by year-end we will see one or possibly two moves. However, we also believe the future is a world of lower interest rates compared with previous experience, combined with lower growth and lower inflation as demographics and the indebted nature of large parts of the world combine to restrain economic activity.