Yellen remains dovish in long term outlook

26th August 2016 By: Ranko Berich

Jackson Hole – 26/8/16

Yellen may have said that the case for rate hikes has strengthened in recent months, but the rest of her speech was overwhelmingly dovish and gave the impression the Fed chair is entirely comfortable with taking hikes nice and slowly.

Yellen’s nod to fiscal policy was decidedly half-hearted, compared to the increasingly direct appeals for looser purse strings we’ve seen from central bankers overseas. The Fed chair expressed a high degree of confidence in monetary policy’s ability to revive inflation, despite ample global evidence to the contrary in recent years.

One argument for hiking rates sooner rather than later is to give the Fed more room to cut rates the next time the economy is faced with a shock. But Yellen devoted a fair amount of attention to debunking this idea, arguing that even a modest increase in interest rates would give the Fed enough room to ease adequately. The implication is that there’s less of an incentive to lift rates in the short term, and that in Yellen’s view rates should strictly follow inflation prospects.

The FOMC has been on an extraordinary talking offensive in the last two weeks. Just about all of the committee has piped up to say that rate hikes are likely in the near term future, but the proof is in the pudding and there will be many investors, traders and analysts that will continue to view the Fed’s remaining meetings this year with extreme scepticism despite the FOMC’s warnings.

By some measures, activity in the US economy is cooling and this could prove yet another excuse to delay hikes, especially given the FOMC’s growing comfort with the US economy’s low interest rate dynamics.