Yellen’s Rookie Hour

Posted on: by .

Did the FOMC meeting and monetary policy halt the rally? It certainly seemed so, and the fact that we are staying the course didn’t sit well with the market. The market reaction clearly showed how Fed-dependent it is.

Yellen’s Rookie Hour


My expectations were 40% she would stay the course and 50% that she would slightly reduce the amount of the taper. It was the “safe” play in her first meeting. She doesn’t want to rock the boat or reverse course in her first meeting. Not much surprise there and, as expected, the market responded with some slight selling pressure.

Fed Statement (more Dovish)

The Fed’s FOMC statement changes and takes a more dovish tone.

Blame the GOP!
Fiscal policy is restraining economic growth.” Clearly, she is blaming the Republicans and Congress. We know that Yellen and her President Obama appointed governors are Keynesians and support more stimulus. She is also far more politically ideologically motivated, as per fiscal policies, supported by her academic papers.

Courtesy of

What U3 rate?
The change of “unemployment rate” to “labor market conditions” makes the Fed’s dual mandate and U3 unemployment guide more ambiguous. In fact, in the last part of the statement they pretty much dispense with using the U3 rate as any guide, “With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance.” But there is no mention of what that forward guidance is. Pretty much we are taking a step backwards on having any guidelines or measurements, making it harder to gauge how the Fed would respond to economic data.

Inflation too low!
They actually think that anything lower than 2% will hurt economic growth. “…inflation persistently below its 2 percent objective could pose risks to economic performance.” Thus they want to increase inflation and that means they must devalue the dollar and reduce it’s buying power. Remember, while that will certainly help exports, we are an import nation and that will certainly hurt you in the pocket book.

Courtesy of jayperoni

What other tools?
The Fed used to have only one tool, changing the fed funds interest rate. Then they came up with QE (printing money and buying bonds and mortgage back securities). This statement adds, “will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate.” It’s the “other policy tools” statement that is not defined.

The statement says they will continue to taper, but they add something else in there indicates that they might not. “…the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course.” Asset purchases not on a preset course?

Interest Rates?
Fed fund rates are not going up any time soon and will remain at current levels, even AFTER they stop the asset purchases (QE). “…it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.”

What about the long run? “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” So they are saying that even AFTER they hit their mandate levels that they will keep interest rates low. By the way, what are normal rates?

The Q&A Rookie Hour

After she read her statement, the Q&A session turned into a sloppy, confusing, and unfocused diatribe. It was certainly rookie hour as she tried to craft her own “Fed Speak”, which failed. The big slip, which has been played over-and-over in the media and written in financial newspapers, was when she was asked about raising rates, she offered rather confusing responses and actually said “in 6 months”. That single gaff sent the market down sharply and contradicted the FOMC statement. Did she mean 6 months from now, 6 months after the New Year, 6 months after the QE program? It now seems the general consensus is it would be in early 2015. Regardless, she tried to back-peddle and the rest of the Q&A session had a tone of uncertainty, academic babble, and lots of “ifs”. It was a shocking hawkish comment that contrasted a rather dovish statement that came as a surprise. However, let’s give her a pass, it is an economically challenging time, it was her first day in the spot-light as the Fed Chair, and she did her best.

The Market

It just goes to show how powerful the Fed is, how much a single word can shake the market, and how much the market relies on current Fed monetary policy. The market sold off slightly on the continued taper, but the market got a shocking jolt from the Q&A session gaff.

Mid-terms come into play.

Whether we like it or not, Fed monetary policy will be slightly crafted heading into the mid-terms. The probably of a taper reduction increases as we get closer to the mid-term elections, they will do anything to help boost government data points and rally the market. Additionally, the probability that we have a rate increase before the mid-terms is almost zero. My expectations are that we see the Fed take baby dovish steps as the mid-term approaches.

Support & Resistance

INDU 16,100
It looks like we could see a pull back down to the 16,000 – 16,100 level before we see support kick in. I would look at 16,000 as the bottom key support that needs to hold if we do get a bounce.

NDX 3,650
I would look at the 3625-3650 range as the low support area, as we look like we may form a double bottom. However, if we can’t hold 3600 I would look at 3550 as the low support.

SPX 1840
The 1840-1850 is the low support range we could fall down to before we see buyers step back in. The VIX moved up yesterday and back in the 15 range. I suspect it could stay in the 15-17 range if we pull back to the support level.

RUT 1180
The 1175-1180 range is the low support area. We are holding up well right now, but if we see weakness is order flow, we could see a pull back to the support area. Watch the support to see if it holds.

Weekly Claims, getting better.

The weekly jobless claims increased by 5,000 to 320,000 as the 4-week moving average fell to 327,000. It wasn’t all that bad and if we can keep the trend up we might be able to breach the 300,000 range. However, while we are seeing a reduction in jobless claims, on average, we can’t automatically assume it is coming from job creation. We need to remember these are only those eligible for claims and that many have run out of benefits and fallen off the rolls. Yet, I can’t help but feel somewhat relieved that we are finally seeing a respectable level of claims and that the trend is NOT increasing. I can only hope this trend continues.

One Response to “Yellen’s Rookie Hour”

  1. McRocket says:

    Thanks for your breakdown of yesterday…it’s helpful.