Research Team at BBH, suggests that Yellen speaks to the NY Economics Club on March 29 and it is her first major event since the FOMC meeting and follows comments by at least four regional Fed presidents sounding somewhat less dovish than the market understood by the FOMC statement and the dot plot.
Key Quotes
“A fifth President, Chicago’s Evans, seen more dovish than the troika of Yellen, Fischer, and Dudley, endorsed two hikes.
Based on our conversations, we suspect that market talk of significant rifts within the FOMC are exaggerated. If the FOMC was dovish, and we still have problems thinking of two rates hikes this year as being dovish, especially given what other central banks are doing, then is seems like a strategic retreat rather than a turn.
A communication or management analysis might conclude that the Fed has overpromised and under-delivered. A compelling way to address the questions of its credibility is to under-promise and over-deliver. Yellen herself indicated at her press conference that the April meeting was live. There is no reason to expect Yellen to back away from this in her remarks in NY.
The June meeting may have much to recommend itself. There would be data on the economy in Q2. The economic projections will be updated. There is a scheduled press conference. There are two drawbacks of the June meeting. First, the market will anticipate it too much, and it will not answer the credibility issue. For that, it needs to surprise the market or sufficiently large part of it.
Second, by waiting until June, the Fed may make itself hostage to market conditions a week ahead of the British referendum. The referendum could be a dramatic event. There have been extreme moves in implied volatility, which in effect increases the price of insurance as the perceived need for insurance has risen.
Yellen’s comments should not be expected to deviate much from the FOMC statement and her remarks at the press conference. She is managing the transition and the beginning of the normalization of monetary policy with a broad consensus. There was no dissent in December when rates were hiked. There was not dissent in January. KC Fed President George was the sole dissent in March. She favored a hike.”
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