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With the central-bank-inspired short-squeeze-driven equity market surge losing momentum,Janet Yellen’s ‘hint-hint’ speech today to The Economic Club of New York comes at a critical moment.Amid the constant chatter of headline-making Fed members, seemingly flooring (and capping) the S&P’s movement with their algo-driving comments, Yellen is caught between a credibility-crushing dovish (the world is collapsing and we need to maintain equity ‘wealth’ creation) rock and the hawkish (rate normalization continues – just look at how awesome jobs are, stupid) hard place. Good luck…

As Citi notes, the same Yellen that showed up at FOMC two weeks ago will be in NY today.

The market has been leaning to a hawkish Fed the last few days after a series of comments that were perceived as somewhat more hawkish than the FOMC Statement, SEP, and Press Conference. It seems most likely that Fed Chair Yellen will come across as neutral or even slightly dovish relative to the current market lean.

 

Bottom line question is whether she and the FOMC want to build speculation on three 2016 hikes (just over one hike is priced in now). Why not live a peaceful life?

They may regret that the market took their message as so dovish as to price in barely more than  three hikes by end-2018, but pointing to April will get the market to way overshoot their desired path. June is about 50% priced-in and that is probably the way they like it.

Live feed from Yellen speaking:

 

Quickly parsing her speech, on one hand we find this attempt at hawkishness:

if the expansion was to falter or if inflation was to remain stubbornly low, the FOMC would be able to provide only a modest degree of additional stimulus by cutting the federal funds rate back to near zero.

And then she quickly offsets this with the following uberdovish text, that has sent risk surging:

Even if the federal funds rate were to return to near zero, the FOMC would still have considerable scope to provide additional accommodation. In particular, we could use the approaches that we and other central banks successfully employed in the wake of the financial crisis to put additional downward pressure on long-term interest rates and so support the economy–specifically, forward guidance about the future path of the federal funds rate and increases in the size or duration of our holdings of long-term securities. While these tools may entail some risks and costs that do not apply to the federal funds rate, we used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed.

 

Of course, economic conditions may evolve quite differently than anticipated in the baseline outlook, both in the near term and over the longer run. If so, as I emphasized earlier, the FOMC will adjust monetary policy as warranted. As our March decision and the latest revisions to the Summary of Economic Projections demonstrate, the Committee has not embarked on a preset course of tightening. Rather, our actions are data dependent, and the FOMC will adjust policy as needed to achieve its dual objectives

And the punchline:

Financial market participants appear to recognize the FOMC’s data-dependent approach because incoming data surprises typically induce changes in market expectations about the likely future path of policy, resulting in movements in bond yields that act to buffer the economy from shocks. This mechanism serves as an important “automatic stabilizer” for the economy. As I have already noted, the decline in market expectations since December for the future path of the federal funds rate and accompanying downward pressure on long-term interest rates have helped to offset the contractionary effects of somewhat less favorable financial conditions and slower foreign growth. In addition, the public’s expectation that the Fed will respond to economic disturbances in a predictable manner to reduce or offset their potential harmful effects means that the public is apt to react less adversely to such shocks–a response which serves to stabilize the expectations underpinning hiring and spending decisions.

In other words, more QE, more forward guidance, and perhaps even NIRP if required, mostly to appease “China and Brazil”, as SF Fed’s Williams explained yesterday.

 

Her full repared remarks: The Outlook, Uncertainty, and Monetary Policy (link)

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