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Yellen Implies Nothing has Changed, Markets Disagree

Posted by Joseph Trevisani on Jun 17, 2015 3:32:00 PM

Federal Reserve Chair Janet Yellen did her best to convince the markets that the central bank is on track to initiate it first rate increase in nine years. But with the dollar lower and equities higher after her press conference, traders seem to have decided that the first hike in the Fed Funds rate is now somewhat less likely in October than it was yesterday.

Despite the Fed’s cautious optimism on the labor market, inflation and wages, what was most telling and for the markets most important, were the downgraded forecasts for the economy this year.

In March the Fed forecast U.S. economic growth would be between 2.3 percent and 2.7 percent for 2015. Although that was before the initial first quarter print of -0.1 percent was known, the bank's economists must have had some inkling that the first three months were going to be a disappointment. 

Today the central bank projected growth of between 1.8 and 2 percent for the year, a drop of 0.6 percent on the median and a 24 percent reduction in the overall rate of GDP expansion. Meanwhile, it raised the unemployment rate estimate to 5.2 to 5.3 percent from 5.0 to 5.2 percent in the spring. Estimates of PCE inflation held steady at 0.6 to 0.8 percent and core PCE was unchanged at 1.3 to 1.4 percent.

For traders lower growth and higher unemployment mean only one thing, zero rates for longer. 


Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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