You May Say I’m a Dreamer, but I’m Not

The butchered John Lennon lyric, uttered by Steve Carrel in a bad comedy movie, aptly describes the current relationship between Janet Yellen and the market. Though the chairwoman and a majority of Fed committee members remain steadfast in their belief that the policy rate will continue to be normalized and that growth and inflation will continue in a gradually rising trend, the market thinks they’re dreaming. During her long-awaited speech at Jackson Hole, Ms. Yellen mostly reiterated the current Fed stance on monetary policy, offering very little new insight as to when the Fed’s next move might occur. She did specifically indicate her faith that improving labor market conditions would in fact push up inflation over the next couple of years to the Fed’s target of 2%. In addition, Ms. Yellen reiterated a comment from the most recent FOMC statement that the case for a policy rate increase had strengthened recently—but also added the caveat that the committee would remain data dependent. The market remains relatively circumspect, as futures implied odds of a hike in September currently remain below 50%, though those odds have nearly doubled from recent lows of around 20%. All in all, the much anticipated weekend in Jackson Hole was a non-event and leaves us where we started, reliant on the incoming data.

Source: Bloomberg, Federal Reserve