Yellen shows doubts

The FOMC Meeting didn´t bring out anything new.

There was, as customary, some “dot shifting”. For example, in June 4 participants thought two more rate hikes this year would be appropriate. Three have “jumped ship. The 4 doves, those that don´t think an additional rate hike this year is necessary, remained the same.

The interest rate outlook for next year remained largely unchanged, with three hikes envisioned. However, the Fed slowed the pace of projected monetary tightening from there. The “forever” (i.e. long-term) rate is now seen as remaining below 3%.

In the post meeting presser, two statements by Yellen were notable:

Yellen: “Our understanding of the forces driving inflation is imperfect.”

Yellen: if we conclude inflation drop not transitory, it “would require an alteration in monetary policy.”

The first one is not new, and likely reflects newfound doubts about her Phillips Curve view of inflation.

The second statement is, as far as I know, new. The “transitory” argument was a way to hold on to her fundamental Phillips Curve belief. Now that´s become wide open. Markets likely believe an “alteration” in monetary policy will happen.

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