Yellen's speech today

Janet Yellen gave a speech in Washington today. She talked about on the current view of economic growth, employment, inflation, and other factors that are important in determining FED monetary policy.


Economic growth is continuing at a moderate pace. The view is that this will continue for the next couple of years. My take is that growth is in the sweet spot right now…not too fast, not too slow.

Employment progress is continuing to full employment. Wage growth improvements have started. The FED is very comfortable with the state of employment.

Inflation is still below the 2% FED objective. Yellen thinks the underlying inflation (w/o transitory effects of energy and the effect of the strong dollar. They want to see it move toward their 2% objective. Yellen thinks this may happen over the next 1-2 years. She also said/implied that the is low risk of inflation getting out of control.

Strong dollar is a drag on the increasing inflation. Strong dollar also is keeping U.S. GDP growth below what it would otherwise be.

Energy prices are still low. Yellen said previously that this is a transitory situation. She expects the effect of low energy on inflation to dissipate over the next 2 years.

What will the FED do at the next FOMC meeting on Dec 15-16?

Short answer: they don’t know yet. There is data coming in on employment, the economy, and inflation between now and the next FOMC meeting.

Yellen discussed the possibility of the decision. Here are a few points she made about a rate raise on Dec 16th:

  1. Data coming in so they haven’t made any decision.

  2. The first rate raise should not be the focus. The trajectory and pace of the rate raise is more important than the timing of the first rate increase.

  3. Keeping rate at zero is a safer way to go as the FED would have an easier time responding should the situation change rapidly.

  4. A counter point to #3 is that Yellen really wants increases to be gradual. This means that the FED prefers not to be in a situation where a rapid increase would be necessary which could trigger a recession.

  5. Points #3 and #4 are contradictory. What they do will really depend on the data coming in during the next 2 weeks.

What it all means

Economy is growing nicely. Whatever the FED does on December 16th, interest rates should be very low for a long time to come. Low inflation and low interest rates are generally good for stocks as it encourages investment in businesses.



I’d really like them to increase 25 basis points and be done with it. It’d be a vote of confidence for the economy and otherwise have very little economic impact. They can leave it there for many future months but at least let’s get the first one out of the way.



…The FED is very comfortable with the state of employment…

Certainly has improved but average weeks unemployed is still very high after six years. Down from 40 weeks in the depth of the recession to 28 weeks, much higher than the 12 weeks when there was actually full employment.

The number of part time workers for economic reasons also remains very high after six years of monetary stimulus. Way down from the depths of the recession but still historically high. About 5.5 million versus about 3.2 million during a period of real full employment at the turn of the century.

October 2015
A best way to help low-wage workers?

…Thus, raising the federal minimum wage reduces the mobility of low-skilled workers significantly. A more efficient way of increasing the purchasing power of these workers, without the side effects of reducing their unemployment, their chances of getting out of poverty, and their likelihood of progressing to a middle-class income level, is the EITC, which the literature has found to increase the employment of low-skilled adults and the income available to their families, to significantly reduce economic inequality and poverty, and even to improve the academic performance of children of recipients.…

Economists. Pick the two worst years for the economy and employment since the Great Depression and draw those general conclusions. Bizarre. A lot of economists at the Fed.

Effective Federal Funds Rate

Bottomed about 1.0 August 2003 and peaked about 5.0 September 2007. About a 10% annualized return on the S&P 500 for those four years. Fear not the Fed. Usually either way too early or way too late.

I wish I had a dime for every time I heard “don’t fight the Fed” 2000-01. As Greenspan et. al. panicked and slashed rates the exact thing to do was to fight the Fed. Probably the better bet but of course I lived a 17% mortgage. The words spilled on 0.25. Unbelievable.

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I recall when interest rates were 17% & 18% the company I worked for
offered the employees a promissory note for 1% less than prime rate. I
made a ton of money on the interest for 3 or 4 years, turned out to be
a great investment. It may be not good to have all your money invested in the company you work for, but it worked out.