Has Yellen Become A Dove Again?

Janet Yellen’s equivocal remarks at last week’s semi-annual Congressional testimony certainly might make you believe that a rate hike at the Federal Reserve’s July 25-26 meeting is hardly a sure thing. Indeed, the odds of that happening are a lot less than 50-50. A lot less.

In her testimony, Yellen remained confident in her previous declarations that inflation would gradually rise to the Fed’s 2% target. “It’s premature to reach the judgment that we’re not on the path to 2% inflation over the next couple of years,” she said. But then she quickly hedged her bets. “We’re watching this very closely and stand ready to adjust our policy if it appears that the inflation undershoot will be persistent,” she said.

Based on the past several months’ worth of inflation statistics, one would have a tough time arguing that lower-than-expected inflation hasn’t become “persistent.” Last month’s consumer price index was unchanged from May and up only 1.6% versus a year earlier, the fourth straight decline by that measurement. That followed May’s personal-consumption expenditures index, the Fed’s preferred inflation measure, which fell 0.1%. The core index, which excludes food and energy, rose 0.1%, but just 1.4% on a year-to-year basis, well below the Fed’s target rate and lower than at the beginning of the year.

Inflation aside, other economic indicators simply don’t justify another rate increase so soon after the 25-basis point increase at the June meeting.

Also last week, June retail sales fell for the second month in a row, declining 0.2% after falling an upwardly revised 0.1% in May, which was originally reported as a 0.3% drop. Despite a 0.4% gain in personal incomes, consumer spending – a broader category than retail sales – rose a modest 0.1% in May after rising by 0.4% in each of the two previous months. A big portion of the weakness was a decline in car sales, which now look to have peaked after several years of strong sales.

Consumer spending also isn’t getting a boost from lower gasoline prices, which have actually gone down instead of up, as they normally do during summer driving season. That bodes ill for energy prices later this year when gas prices normally retreat anyway and continued low inflation.

The rebound in the jobs market by 222,000 in June also needs to be taken with a grain of salt. Some analysts, such as Moody’s Analytics chief economist Mark Zandi, seem to believe, along with Yellen and other members of the Fed, that the jobs numbers are not fake news and that the 4.4% unemployment rate should be taken at face value. “At this pace, which is double the rate of labor force growth, the tight labor market will continue getting tighter,” Zandi said.

While the numbers may be measuring something, we should have learned from the last presidential election that the numbers don’t necessarily tell the whole story. It’s just simply hard to believe that we are at “full employment” and that the labor market is in danger of “overheating” when so many millions of people are still not working – many of them because they’ve given up trying to find a job – and the vast majority of employed people have had to make due with small raises, or none at all, for years.

A friend of mine who works at a financial publishing company says his firm hasn’t raised salaries, except for promotions and for sales people, since the financial crisis, yet many people choose not to leave because of fear of finding a new job. While this may be an aberration and may not be the norm in other industries, notably tech, how many people stay in their jobs and don’t demand more money because the shadow of the crisis still hangs over the job market? The only thing tight is employers’ payroll policies, and they seem comfortable keeping them that way.

We also probably can’t expect the near unanimity that we saw at the Fed’s June meeting when only Minneapolis Fed President Neel Kashkari voted against the rate increase. This time he may be joined by Dallas Fed president Robert Kaplan, who reiterated last week that he wants to see further evidence of increased inflation before he votes for another rate hike. Charles Evans, the head of the Chicago Fed, has made similar comments.

What may have a bigger effect on the bond market is what the Fed decides to do about unwinding its $4.5 trillion bond portfolio. The minutes of last month’s meeting showed a division on this subject, too, with “several” members wanting to start the process “within a couple of months,” while “some others” preferring to wait until later in the year.

The Fed doesn’t meet again until September 19-20. Expect the Fed to do the prudent thing and wait until then to take any meaningful monetary policy actions.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.