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Last Thursday U.S. Fed Chair Janet Yellen confused markets once again when she seemed to contradict the Fed’s cautious policy statement from the week prior. For example:
- Fed Chair Yellen said that the currently low levels of U.S. inflation are likely to prove transitory, but the U.S. Fed’s latest forecast doesn’t show overall inflation returning to the Fed’s 2% target until 2018. Transitory is defined as “brief, short-lived and passing” and this simply doesn’t correlate with the Fed’s forecast for a gradual increase in the rate of inflation.
- The Fed had cited heightened global instability risks as a main justification for keeping its policy rate unchanged, yet last week Yellen said that she doesn’t expect these same forces to significantly alter the Fed’s policy. Haven’t these forces already significantly altered the Fed’s monetary policy?
- Fed Chair Yellen said that most Fed participants still anticipate that it will be appropriate to begin raising its policy rate later this year, but the market is pricing in a low probability of this occurring (and the market has proven much more accurate than the Fed when it comes to forecasting the policy rate). While she included many caveats, like inflation increasing more slowly or the dollar falling more sharply than expected, it seems increasingly unlikely that the Fed will actually raise its policy rate in 2015. I wonder if Fed Chair Yellen is once again trying to use her words to keep the market from adopting a ‘low-rates-forever’ mindset without actually backing up these words with action. If that’s true, it’s hard to imagine that this technique will work for much longer before the Fed has to put its money where its mouth is.