The Federal Reserve met yesterday and Chair Yellen held a press conference to announce the results of what America’s monetary politburo decided. As was widely expected, Yellen & Co., dropped language about being patient on hiking interest rates. The implication is that the Fed can now hike rates at any meeting. But don’t get too excited. In an apparent effort to keep Goldman flush, and to avoid another spasm in interest markets as occurred during the so-called taper tantrum in 2013, Yellen & Co. struck a much more dovish tone on the economy and rates. The Fed downgraded its forecast for growth, inflation, and most importantly, the pace of interest rate hikes for this year and next.
Yellen explained the Fed’s about-face by telling Americans (with a straight face mind you) that her compatriots now believe there is greater slack in the labor market than they did in December. That is a rather shocking statement in the face of the fastest pace of job growth since the recovery and an unemployment rate that is now sitting at 5.5%—a rate which only months ago was considered full employment.
The Fed has once again moved the goal posts for when it will hike interest rates. In December of 2012, the Fed told us that it would hike rates when unemployment fell below 6.5%. But when the unemployment rate hit 6.6% last March, Yellen dropped the 6.5% threshold and told investors to focus on a range of labor market indicators. Now with the U.S. economy at full employment, the Fed has found another reason to continue running emergency monetary policy. How are they doing it? The same way any good central bank setting policy by the seat of its pants would, by redefining full employment. As you can see in my chart below, as the unemployment rate has come down the Fed’s forecasts for full employment have also moved down, allowing the bank to maintain easy money. Problem solved. Unless of course you are one of the millions of American savers or retired investors suffering from the seven year famine in interest income.
Jeremy Jones, CFA
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