As the stock market prepares to close later today, Yellen will deliver a speech on the new normal for monetary policy at a conference hosted by the San Francisco Federal Reserve, of which she was previously the President. The question on many lips today is whether she will be more hawkish than she was at the press conference following the FOMC meeting.
This begs the question.  Many people in the market understood her to be dovish, but we were and remain less sanguine.  Yellen (and Fischer) have emphasized the data dependency of the Fed’s course, and some investors may not be persuaded until stronger data are reported.  Obviously next week’s employment report looms large.
In her Congressional testimony last month, Yellen strongly hinted that the Federal Reserve would lose its “patience” in its forward guidance. She cautioned that this was not to be understood as a signal an imminent rate hike at the next meeting.  Sure enough, the FOMC statement dropped the “patience”, thus completing the evolution of the Fed’s forward guidance from longer to shorter time frames, and now, data dependent.
After expanding in excess of 4% in the April-September period, the US economy slowed considerably in Q4 and appears to have slowed even further in Q1 15. The recognition of this is what led to downgrading of the Fed’s assessment of the economy. The story does not stop there. Yellen was clear about this: Even with the downgrade, the US economy is expected to grow above trend this year.
The leadership and the majority of the Federal Reserve seem to recognize an underlying resiliency of the US economy. The extreme imbalance between economic sectors has been reduced,  The quarter-to-quarter pace of growth may be more volatile than desired, but the average pace is a bit faster than suggested to be sustainable given labor force dynamics and productivity. Â
They do not seem blind to the concerns expressed by Bridgewater’s Dalio recently about the potential parallel with 1937, but they appear to have more confidence that it is on a more solid track.  In any event, monetary policy will remain extremely accommodative by nearly any metric for some time still. Indeed, the FOMC statement recognizes that the Fed funds rate is unlikely below what officials regard as the equilibrium level throughout this cycle.
