Fed Gets Incrementally More Hawkish, but no Major Changes in the Near Term

The minutes from the most recent Federal Open Market Committee meeting were released last week and point to a Fed that is becoming incrementally more comfortable with the economic recovery and labor market fundamentals.  A majority of the minutes were devoted to the labor market, where “many” Fed officials believe that labor market conditions have improved faster than expected.  If this continues, (emphasize “if”) the FOMC may raise rates sooner than current consensus expectations.  This commentary was a nice lead-in to a highly anticipated speech by Chairwoman Yellen on Friday during the annual Jackson Hole, Wyoming economic symposium.  In her speech, Yellen echoed the positive developments that were highlighted in the  minutes, but pointed to considerable slack in the labor market as reason to keep monetary policy loose.  Our main takeaway from the events of last week is that the Fed remains committed too loose policy for now, but should the economy continue to strengthen, their hand will be forced into normalizing policy, which many fixed income investors are not prepared for.  Volatility could ensue, which we are ready to take advantage of.