When doves fly

There's that question answered.  Janet Yellen emphatically affirmed yesterday that little has changed for her since the March FOMC meeting.  While it's certainly frustrating for many who choose to take a normative view in analyzing Fed policy, there's little point in getting angry for the rest of us.   This is what it sounds like when doves fly.

Macro Man could spend all day writing about the speech, but let's summarize it in a few bullet points.

* She mentioned "oil" 17 times
* She mentioned "global" 11 times
* She mentioned the dollar 7 times
* She used the word "financial" 20 times
* She used the word "labor" 9 times
* She referred to the "downside" 2 times
* She referred to the "upside" 0 times
* She spent 3 paragraphs on the downside risks to growth
* She spent 1 paragraph on the upside risks to growth
* She spent 4 paragraphs on the downside risks to inflation
* She spent 1 paragraph on the upside risk to inflation
* She spent 3 sentences discussing how to remove accommodation
* She spent 5 sentences on how to add accommodation

It really doesn't get much more dovish than that.   Yellen also alluded a number of times to shifts in market pricing for policy rates and the concomitant impact upon bond yields, singing the praises of this development, which in her view apparently explained the relative resilience of the US economy, employment, and inflation.  The notion that large swathes of the domestic economy might be relatively insensitive to changes in the global environment and short term swings in interest rates was apparently one that she did not care to countenance.

In any event, the proposition that the bond market is efficient and effective in responding to changes in economic developments is certainly debatable.  While getting an accurate and timely reading on "changes in economic developments" can be a challenge, using an economic surprise index is probably a reasonable proxy to measure shocks to embedded economic forecasts.  Since Yellen took office, the responsiveness of bond yields to shifts in economic surprise has been tenuous at best:

What is clear, however, is that the Fed takes its cues from market pricing.  Only once since 1994 has the Fed hikes rates with the market pricing less than a 50%   chance of such a move the week before...and that was the very first hike in February 1994.  (The false tightening readings before rate cuts came in 2008, when the Fed funds market was wonky, to say the least.)

Not every market expectation is created equal, however.  While Macro Man has not performed a thorough exegesis of Fed communications prior to rate announcements over the past 22 years, it is certainly his recollection that the FOMC, particularly under Greenspan, was more forthright in lecturing both Congress and the market in the past.  The current iteration of the Fed, on the other hand, has done little to impose its will upon markets despite its rather unhealthy fetish for forward guidance.  The Yellen Fed is like a poker player who always folds whenever you shake up the pot a little bit.

Regardless of what you think of the Fed's policy decisions, one legitimate criticism is the ongoing torrent of verbal diarrhea from the various members of the FOMC.    Yes, all animals are equal...but it's pretty clear that some are more equal than others.  Particularly given the veritable Everest of uncertainties that Yellen catalogued in her speech, it really isn't helpful for so many different views to be articulated if the Fed is truly interested providing useful guidance.  On the other hand, if they just want to provide participants' medals for all those who don't qualify for membership of the Doves' Club, then the status quo works just fine.

In any case, it's pretty clear that Yellen would be a lousy drinking partner; after all, her glass is always half empty.   Looking forwards, as a public service Macro Man is pleased to provide you with a handy guide to future rationalizations as to why policy must remain on hold just a wee bit longer:

April 27: Insufficient evidence of China recovery, non quarterly meeting (unofficial)

June 15: 8 days before Brexit vote, too dangerous to risk market volatility

July 27:  Summer markets are too illiquid to handle a hike, non quarterly meeting (unofficial)

September 21:  Too close to US election

November 2:  Too close to US election, non quarterly meeting (unofficial)

December 14: You saw what happened after the last time we hiked in December, right?

In the meantime, the rest of the world and certain FX punters should console themselves that the infamous Greenspan/Bernanke/Yellen put for the SPX has now been extended to a dollar call (h/t MG.)  It seems that way at least, though with everyone else also apparently intent on easing monetary conditions it may be hard for the Fed to talk down the dollar, even though Yellen's trying her damnedest.

In that vein, price action in commodities will continue to be very interesting.  Later today Macro Man will post a few commodity charts as part of the CTA proxy model project.