Yellen Finishes 2014 with a Win

They said the Fed couldn’t taper without massive market dislocations. They said the Fed was “trapped” and “backed into the corner” and “behind the curve” or that there no longer was a curve anyway – just endless helpings of stimulus and no benefit accruing to the economy whatsoever.

In the meantime, the FOMC has now removed itself from new bond-buying operations completely as its current portfolio begins to slowly wind itself down over time. Employment is strong and we’re starting to see quarterly GDP releases with a 4-handle in front of them. Inflationary pressures are nowhere on the horizon for the time being, with Bank of America Merrill Lynch’s economists saying the risk is lower, not higher, for prices throughout the economy. They see core PCE hovering around 1.4% next year with the risks being to the downside.

Ethan Harris writes about Yellen’s year-end victory and the three key things we can take away from the Fed’s final performance of 2014:

Turning to the Fed, we think the latest directive and press conference confirms three key calls. First, they would much rather go too late rather than too early. Hence Yellen acknowledged that they expect to slightly overshoot full employment and she all but ruled out a hike in January or March. Second, the Fed is getting increasingly worried about missing the inflation target, but they are not ready to admit it; instead, they are “closely monitoring” inflation. Third, the Fed clearly wants to avoid shocking the markets. This is why Yellen has repeatedly downplayed shifts in forecasts and language. This talk therapy was taken to a new level this week when they substituted “patient” for “considerable time” and then said they mean the same thing!

All of this underscores a key aspect of Fed watching. Trying to forecast the exact language change in the FOMC directive is a bit of a fool’s errand. Instead, look for the Fed to change policy in a way that only slowly and modestly tightens financial conditions. By this metric, the latest meeting was a success: they got rid of “considerable time” with only a modest rise in interest rates and a surge in the stock market.

Over the last two days, since the Fed’s press conference, the S&P 500 has gained 4.5%. The Dow rallied over 400 points yesterday after a monster day on Wednesday. It was the biggest two-day rally for stocks since November 2011 at the end of the Euro Crisis panic.

Amazing how far we’ve come – disinflation being the bigger issue than jobs growth. In Janet Yellen’s mind, this has got to be a clear win.


The ghost of disinflations past
Bank of America Merrill Lynch – December 19th 2014

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