With pundits unable to decide if Yellen’s speech was hawkish or dovish, we need a tiebreaker, and as always the best one is the bank that has spawned more central bankers than any other institution, Goldman Sachs. As such, according to the just released analysis of Goldman’s Jan Hatzius, the Fed speech “raised the odds of a rate increase at the September FOMC meeting,” but he adds that “any action will depend on the result of next week’s jobs report. “
Full take from Goldman’s “Yellen Remarks Point to Higher Odds of September“
BOTTOM LINE: Fed Chair Yellen’s remarks to the Jackson Hole conference raised the odds of a rate increase at the September FOMC meeting, in our view, but any action will depend on the result of next week’s jobs report.
MAIN POINTS:
1. In a speech to the annual Jackson Hole symposium today, Fed Chair Yellen said that the “case for an increase in the Federal Funds rate has strengthened in recent months”. This comment follows remarks from other Fed officials over the last two weeks indicating that policymakers see an improved economic backdrop and reason to consider a rate increase over the near-term. Although neither Yellen’s comments nor those of other officials have been explicit on the precise timing, this may reflect message discipline ahead of the August employment report to be released next week. In our view, if the employment report continues to indicate an improving labor market, the FOMC may well raise rates at the September meeting. As a result, we have increased our subjective odds of a hike at next month’s meeting to 40% from 30% previously. We also now see a 40% chance of a rate increase at the December meeting, were the committee to remain on hold in September. Therefore, our cumulative odds for at least one increase this year are now 80%, up from 75%.
2. The remainder of Yellen’s comments were a balanced discussion of longer-run policy issues. On the prospect of a higher inflation target or other changes to the Fed’s objectives, Yellen said: “I should stress, however, that the FOMC is not actively considering these additional tools and policy frameworks, although they are important subjects for research.” She expressed caution about the level of equilibrium interest rates, noting: “By some calculations, the real neutral rate is currently close to zero, and it could remain at this low level if we were to continue to see slow productivity growth and high global saving.” This may indicate a flatter path for rate increases in the coming years, but we do not see this view as standing in the way of an increase over the near-term.
The market disagrees, as September rate hike odds have declined from 32% before to 26% after Yellen.
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