Federal Reserve Vice Chairman Janet Yellen addressed the Economic Club of New York on Monday, and Steve Blitz, senior economist at ITG Investment Research, saw indications within that speech of a dual change in policy on the horizon.
While some news media reports took her words to mean that the status quo on monetary policy would prevail, Blitz got a different message: that the Fed could be preparing to take not just one action, but two, and those concurrently.
Blitz criticized reports that cast Yellen’s speech as “more of the same,” and said instead that the “acknowledged head dove” of the Fed instead was saying something very different: that the Fed could at the same time end QE2 and also raise interest rates—something Blitz believes the markets are ill prepared for.
Blitz focused on a portion of Yellen’s speech in which she said that “it will become necessary for the FOMC to withdraw the monetary policy accommodation we have put in place. That process will involve both raising the target federal funds rate over time and gradually normalizing the size and composition of our security holdings.”
This, he said, indicated that the Fed might tackle rates and balance sheet together, and offered some insight into the amount of time the Fed expected to have to move against inflation once it got the signal from the FOMC to take action.
Inflation would appear to be the motivator here. He pointed out that Yellen said the Fed would not allow an environment of high inflation coupled with high unemployment, such as happened in the 1970s, to recur. How to avoid that? Says Yellen, “… policy firming to ensure that longer-term inflation expectations remain firmly anchored.”
Blitz says of her statement, “She doesn’t think wages are going to rise in the current economy and neither do I, but the expectations argument makes clear that the FOMC does not want perception to become reality.”
Unless, says Blitz, upcoming data releases present “downside surprises,” he foresees a “hawkish reworking of the FOMC statement at month’s end.”