This article makes sense, but only if (1) the FED has a strategy for raising rates, and (2) this strategy will work. Don’t assume either one.
Market observers are parsing every comment from the Federal Reserve (Fed)’s most recent statement and Fed Chair Janet Yellen’s accompanying press conference, trying to determine where the Fed’s words fall on the “dovish” to “hawkish” spectrum.
If I had to weigh in on the debate, I’d say the September Federal Open Market Committee (FOMC) policy statement was “hawkish.” But more importantly than such nomenclature, I believe there were five signs in the statement that the anticipated pace of policy rate hikes is going to be quicker than markets have expected.
Toned down “dovish” phrases. While the September statement retained both “keyword phrases” that are interpreted as highly dovish (“maintain the current target range for the federal funds rate for a considerable time” and “significant underutilization of labor resources”), Fed Chair Yellen appeared to dilute the strength of the “considerable time” language in her press conference, implying that a “considerable time” could be a shorter time period than many expect.
Back in March, Chair Yellen, perhaps mistakenly, said that a “considerable time” was six months. Then, at her September press conference, she said “a considerable time” isn’t mechanical, shouldn’t be read explicitly in calendar terms, will be data dependent and could come sooner than many expect. In other words, it could be three months, or if data weaken, it could be 12 months. Given that current economic data are solid, as the Fed acknowledges (see more on that below), a “considerable time” is likely to be shorter rather than longer. In other words, to me, Chair Yellen’s comments go a long way toward weakening the Fed’s dovish language.