Tuesday, September 13, 2016

Brainard Did Not Speak For Yellen Today; Hike Still On The Table

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*Fed Governor Brainard remained dovish.
*We show that she likely did not speak for Fed Chair Yellen. That's what matters.
*We think the next FOMC vote can come down to the wire.
*That means volatility on or before Fed day.

Fed Governor Brainard scheduled a last-minute speech before a Fed quiet period. In combination with Fed President Rosengren's hawkish speech last week, markets worried on Friday. Fed Governor Brainard proved to remain a dove today, which calmed markets. Does she speak for Fed Chair Yellen? That's the main question. We don't think so. The upcoming FOMC vote may come down to the wire and we expect markets (NYSEARCA:SPY) to be volatile in anticipation and on a decision. We think a rate hike is still "on the table."
Let's Review Fed Governor Brainard's Key Points
She said the economy is in a "new normal," which "counsels prudence in the removal of policy accommodation." She doesn't want to raise rates.
Here are her key reasons:
  1. Inflation has not responded to a strong jobs market.
  2. Even though there are more jobs labor slack remains. The jobs market is not at full utilization.
  3. Foreign markets matter and the Fed needs to be cognizant.
  4. The neutral rate for the economy will remain low for some time.
  5. Policy options are asymmetric. If they raise and cause another recession they can't clean up the mess. For that reason it's better to shy away from raising.
The main question we'd want to ask to these points is if this is Fed Chair Yellen's view or not.
Fed Chair Yellen said several weeks ago:
Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook.
Thereafter a slower non-farm payrolls number ("NFP") came out. We do not know if the Fed Chair would maintain her statement after the slower NFP number. We want to see if this last minute speech by Fed Governor Brainard was a charge to correct Fed Chair Yellen's view. We're about to show that was likely not the case.
Let's review each point above to see how Fed Chair Yellen would react and if it helps us know if she would change her view after the NFP report.
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