Are FOMC Members Creating Doubts about the December Hike?

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Part 2
Are FOMC Members Creating Doubts about the December Hike? PART 2 OF 6

Why Yellen Said Key Assumptions by the Fed Could Be Wrong

Yellen’s first speech after the September FOMC meeting

In her first speech since the FOMC’s (Federal Open Market Committee) surprise September policy statement, Fed Chair Janet Yellen sounded a tad dovish in her assessment of the US economy. She was speaking at the 59th annual meeting of the NABE (National Association for Business Economics) in Cleveland, Ohio, and the topic of discussion was inflation (SCHP), uncertainty, and monetary policy.

Notably, Yellen said that the underlying economic trends have drifted away from the central bank’s forecasts, stating that she and her colleagues may have “misjudged the strength of the labor market.” Needless to say, this statement created some doubt among markets (BND), which had been preparing for a rate hike in December.

Why Yellen Said Key Assumptions by the Fed Could Be Wrong

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Rate hikes are still required

Despite her acknowledgment of some Fed policy miscalculations, Yellen held on to the view that a regular pace of rate hikes will be necessary. In her view, the low levels of inflation (TIP) are undesirable, as such a scenario usually leads to lower interest rates, even in normal circumstances. This reduces the tools available to the central banks to fight slowdowns in times of recession.

Options to be left open

Yellen also stated that the central bank is assessing its options to see if its projections turn out to be wrong, blaming extended periods of lower productivity and reduced inflation (VTIP) expectations for the lagging US growth and inflation.

The key takeaway from Yellen’s speech would be that the uncertainty surrounding the December is likely to continue puzzling markets and leave volatility (VXX) levels higher going into each unemployment and inflation (CPI) report before the December FOMC (Federal Open Market Committee) policy meeting.

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