May 27 2016 - All Aboard!
Prior to receiving the Radcliffe Medal at Harvard on May 27, Fed Chair Yellen was asked pointedly by Professor Gregory Mankiw if she wished to provide any insight on the policy path. He gave her an out and said it was okay to say, "no," yet Ms. Yellen went ahead and tackled the question.
Her response generally followed the script of what was conveyed in the minutes from the April meeting. In brief, she said growth is picking up, and if that continues, and the labor market continues to improve -- both of which she expects -- then a rate hike is probably appropriate in the coming months.
The impact of her remark lies in the understanding that she had a chance to walk back some of the rate-hike warnings issued by other Fed members of late. She didn't do that. Instead she walked along the same path, putting the market on notice that a rate hike will happen relatively soon if the data continue to improve.
The market took a dip immediately after she made her remarks, yet there wasn't any significant fallout, presumably because the data received for the second quarter so far has implied that Ms. Yellen was more likely to toe the recent party line than not if she happened to talk monetary policy.
Trading conditions were thin on the Friday ahead of the Memorial Day weekend, so it was probably best not to cast too much judgment on the market's knee-jerk response following Ms. Yellen's remarks.
However, it is evident now that the Chair of the Board of Governors is on board with the thinking that economic conditions are turning ripe to implement the next rate hike on the gradual and cautious path to policy rate normalization.
--Patrick J. O'Hare, Briefing.com