Federal Reserve Chair Janet Yellen delivered the keynote address this morning at the Kansas City Fed’s Jackson Hole conference. While noting that the discussion over when to raise interest rates is naturally shifting and dependent on data, Yellen noted "significant" under-use of labor resources. She also noted that the decline in the unemployment rate overstated the improvement in the overall labor market.
While Yellen’s comments were not much different than those released in the FOMC’s minutes earlier this week, stocks picked up a bit shortly after the speech was released as traders may have detected a more dovish tone.
Nick Colas of ConvergEx Group detected the same sentiment. “My general take is that it’s quite bullish for the stock market; she indicates that she’s looking at a whole range of factors to determine the labor market conditions in the U.S.,” he says in the attached video. “We shouldn’t be fearful of a quick raise in rates because she sees a lot of gray between all the black and white that we want to draw from it.”
The FOMC policy minutes also revealed a rising debate among Fed governors pitting those who want to start raising rates now against those in the Yellen camp who don’t want to move rates too quickly. Not surprisingly, it seems Yellen’s camp still has the edge.
Colas’s firm ConvergEx polled the financial industry on Yellen’s performance thus far into her term, and more than half of respondents gave her a grade of ‘B’ or better. Colas surmises that the grade could have been better had she executed a plan to start raising rates.
“Her Federal Reserve will be known for how they unwound all the stimulus from the financial crisis, and how they got the yield curve to a more normal historical rate.” Case in point, ConvergEx’s poll found that 59% of financial industry professionals believe the Fed is behind the curve on raising rates.
Market participants are betting rates will begin to pick up in Q1 of 2015, and Colas believes they are right. “That seems very accurate given all the guidance we’re getting from the Federal Reserve,” he says. Colas predicts we’ll see a rate cycle that’s very slow and moderate but does begin in Q1 or Q2 of next year and continues for at least 12 to 18 months after that, which would be unlike old rate hike cycles “where the Fed would go 25-50 basis points every meeting for a year or two.”
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