While the world’s financial markets continue eyeing the U.S.’s Federal Reserve for a clear indication on the direction of interest rates, Fed Chair Janet Yellen is growing increasingly more concerned about a U.S. economy that is showing signs of slipping back into another recession.
This shouldn’t come as surprise, considering the recovery from one of the deepest and most devastating recessions in history has been sluggish at best. While addressing policymakers at a luncheon in Boston, Yellen discussed the possibility of trying to undo the damage done to the economy back in 2008-2009 “by temporarily running a ‘high-pressure economy,’ with robust aggregate demand and a tight labor market.”
These and other comments made in recent days would indicate that Yellen in not yet convinced that the unemployment and consumer confidence issues have been adequately addressed. This might also give the financial markets a little more insight as to why the Fed has been so reluctant to increase rates.
It didn’t take long for Yellen’s comment to reach the bond market where both 30-year bonds – US30YT=RR and 10-year notes – 10YT=RR reacted by hitting its highest levels since June of this year.
When discussing his interpretation of Yellen’s comments, Jeffrey Gundlach, chief executive of DoubleLine Capital, pointed to this Yellen quote: “‘You don’t have to tighten policy just because inflation goes to over 2 percent. Inflation can go to 3 percent, if the Fed thinks this is temporary.'” Gundlach, who stated he agreed with Yellen, later added, “Yellen is thinking independently and willing to act on what she thinks.”
It would seem that investors are still hedging towards the Fed raising interest rates towards the end of the year because of inflation fears and a sub-5% unemployment number. Beyond that, Yellen seems to be indicating the Fed is willing to simply sit back and take another look before increasing rates again after the first of the year.