Fed goes really really all in on Wealth Effect

If you were  forced to listen to the circuitous ramblings of Janet Yellen yesterday,one had to be amazed at the degree of precision ascribed to the Feds various forecasts. Not only were the forecasts precise, but astoundingly they did not even make any economic sense. According to Chairman Yellen, the jobless rate is projected to fall to 5.1% by 2016 with prices also remaining  stable throughout that same period. In their rosy scenario, the funds rate only rises to 150 basis points, thus further cementing negative real rates at the front end of the curve. When asked about the recent uptick in the overall price level, she dismissed this as simply noise and also downplayed the decline in unemployment as lacking substance given that the composition of these new jobs was suspect. One has to wonder at what point the capital markets will wake up to the fact that the Fed is simply a one trick pony at this stage. We had to laugh at a Bloomberg interview, post news conference, in which an analyst commented that the Fed has many options still open to it in the event of some “black swan” event. This analyst stated that they always could engage in more forward guidance if need be. We may be wrong, but if the unforeseen comes to pass(and it always does) simply stating categorically that they will do nothing for longer will probably not do the job. The reaction in the dollar, and more pointedly commodities, after this latest round of Central Bank inaction is a clear signal that the maybe the wake up call is now upon us. Buy Stuff

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