However, while her comments certainly were more dovish in tone than most other Federal Open Market Committee (or FOMC) members, she did acknowledge improving labor and inflationary conditions, and this strikes me as the most significant part of her statement. Why?
These comments from Chair Yellen, along with the recently released minutes from the FOMC’s July meeting, show a Fed that is clearly angling toward more near-term policy normalization. As such, I continue to expect that the move to higher rates will begin sooner than many anticipate, given the pace of economic growth, the Fed’s targeted objectives and the harmful economic and market effects of excessively low rates.
Market Realist – The graph above shows how unemployment rates have been falling in the past few years. The current rate is hovering around 6.2%.
Comments from Yellen regarding improving employment and inflation conditions signal an impending tightening of monetary policy. This tightening should lead to an increase in the currently depressed rates.
Excessively low rates are harmful for the economy. They can lead to wage inflationary pressures or misallocation of capital and can cause companies to ignore growth investments.
U.S. companies have been using the currently prevalent low rates to issue corporate debt (LQD)(AGG). They’re using these funds for buybacks instead of growth investments. The companies in the S&P 500 (SPY)(IVV) spent $241 billion in buybacks and dividend payments in the first quarter of 2014, according to the S&P Dow Jones Indices. The biggest corporate players for buybacks include Apple Inc. (AAPL), Exxon Mobil (XOM), IBM (IBM), and FedEx (FDX).
Read the next part of this series to learn when the Fed will raise rates.