Do you expect Janet Yellen to make any changes to the Fed’s future direction for forward guidance at the February monetary policy meeting? For how much longer do you expect the Fed to keep rates low, in the face of the drop in the unemployment rate to 6.6% last month?
Yellen will not be able to make any real sweeping statements or flick a switch to fix the fragile state of the US economy. The best metaphor I can use it that the US economy is a huge container vessel traveling at speed that has been set on its course by Captain Bernanke. He has now left in the only life raft available and is sipping cocktails in the Soggy Dollar bar with one eye on the horizon.
Yellen however being the new captain has unenviable task of deciding what comes next. You can’t just stop QE or ‘drop anchor’ completely at this speed, nor can you just set a totally new course. Yellen in real terms has very little room for manoeuvre metaphorically or economically. What is the most concerning part of all this is that she knows it, I know it and so does everyone else in the market. This means that rife speculation and volatility has once entered the markets.
This is the only things that Yellen can really start to address and give honest and clear forward guidance. Bernanke although has done the best he could under testing conditions however he was less than decisive with his message to the markets on forward guidance. Knowing he was due to step down, I can’t really blame him – his only human after all. Yellen now has to be clear on forward guidance and let the market know in no uncertain terms when QE will end. When the FED will, and they will have to, move on rates, and also be clear with time lines and ‘conditions’ like economic data. Only after the FED do this will the bond and stock markets be able to efficiently be able to price this in, and once again return to trading in ‘normal’ conditions.
Steve Ruffley Chief market strategist Intertrader.com