"If the incoming information supports that expectation then our statement indicates that December would be a live possibility." - Janet Yellen
Janet Yellen dropped a bombshell yesterday, and the market paid attention. The stock market rallies grinded to a halt and gave up some ground. However, it was the action in the bond market that underscored the impact of the Federal Reserve chair’s observation that December could welcome the first rate hike in years. It seems the canary in the coal mine is taking Yellen seriously.
In addition, the New York Fed President William Dudley said he was in “complete agreement.” The Two-Year yield was just 0.61% on October 22, and it has since rocketed to 0.84%.
Yellen’s contention that the “U.S. economy is performing well” isn’t shared by many, including me. However, it’s long past time for the Fed to step away, in part so that the economy might get better traction and return to a normal business cycle.
The dollar also got stronger as well, which means more misery for multinational businesses. Look for a lot of anxiety over her comments and tomorrow’s jobs report. Eventually, the Fed will have to hike rates; but when it comes, the hope is the doves will really see and believe the economy is performing well, not taking some kind of self-congratulatory victory lap.
The market is going to have to come to grips with a rate hike in December for another reason. Unless there is an absolute emergency, the Fed will be loath to take any action in 2016, because of its past influence on presidential elections (read lost White House for Bush senior). So, look for a 25-basis-point rate hike to build a small cushion.