We're not sure anybody was listening to the testimony Fed Chair Janet Yellen gave to Congress today (link). Will she stay on until the end of her term? Who cares. Is the Fed political? No offense, but who cares. We want to know about inflation expectations and changes in rate moves. The Fed is admitting that based on coming fiscal policy, if you listen, they are way behind the curve. That will require more rate hikes and cap markets more and more.
Let's review some of the key points of Fed Chair Yellen's testimony today to Congress. We're gong to touch on some of the key point.
Will she stay on through 2018?
Who cares. Ne-ext.
Is the Fed independent? Are they political?
C'mon, who cares? Ne-ext.
Same old long run productivity questions?
Is the Fed behind the curve on inflation based on the ridiculously high fiscal plans while the economy is already teetering on full employment and 2% inflation?
And will they need to jam rates higher more than they originally expected in 2017?
Hey now those are great questions Congress. That two-hour meeting could have taken about 20 minutes. Let's get to the main points.
Let's all analyze together.
First analyst question we need to ask:
Will the all-Republican government get through any of president-elect Donald Trump's campaign promises?
Yes. If they don't they will look bad. They will push some of this through. Many look bad for not supporting Trump after his strong election win and they have to line up now.
Some of his plans are going to happen.
Is it inflationary?
Here's what Fed Chair Yellen called the coming fiscal plans:
"Inflationary." (after about 38 minutes)
Do you need more than that?
Will the Fed need to have more rate hikes in 2017 than the two that they currently plan? Yes.
Let's listen to the Fed Chair tell everybody in broad daylight that based on the new fiscal plans they are behind the inflation curve.
"My interpretation would be that markets are anticipating that you will ultimately choose a fiscal package that involves a net expansionary stance of policy and that in a context of an economy that's operating reasonably close to maximum employment with inflation heading back to 2% that such a package could have inflationary consequences that the Fed would have to take into account when devising policy and that the market response is consistent with that view."
Elazar translates Yellen,
"Oh that bond crash that just happens, yeah they got it right. We agree. We're pretty much way behind the curve now if any of that new fiscal policy hits. We now need way more hikes than our always-wrong dot-plots predict. It's going to be pretty inflationary."
The Fed Chair went on to say again,
"We will be watching the decisions that Congress makes and updating our economic outlook as the policy landscape becomes clearer and taking into account those shifts in the economic outlook for the appropriate stance of policy but I think that is how I would interpret the market response."
Elazar translates Yellen,
"The market response, the bond crash knew we are way behind the curve now based on this huge fiscal policy coming January 20th. Inflation is about to jump and the bond market got it right. We need to update our stance in policy but only when these laws become more clear."
Now is where your analysis will come into play. How much of that infrastructure spending and those tax cuts pass while the economy is already at full employment? Some of them.
Does the Fed need to up their Fed funds targets and inflation targets for next year? Yes. By how much? A bunch.
When will they do it? Only when they see the policy.
If you already know the fiscal policy is coming you can front-run the Fed. Inflation and more hikes are coming. Connect the dots. They just told us in Fed-ese just above.
The Fed is clearly behind the curve. The Fed just said the bond (NYSEARCA:TLT)(NYSEARCA:AGG) market got it right that there is more inflation than what the Fed is expecting. More rate hikes are needed versus what is currently expected. Why can't they change expectations yet? They need to see the policy get through. Two more months. We can assume it will. As analysts we now have a leg up to know what will happen before it happens. The Fed just told us. Markets (NYSEARCA:SPY) please be aware. These are major changes. Eight years of slow slow slow - meet 2017 of jamming inflation and rate hikes.
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