Federal Reserve Chairman Janet Yellen reinforced her dovish stance Friday in a speech giving her even more wiggle room on the subject of when the country's monetary policy might be adjusted upward.
For market watchers and analysts, the key takeaway was, 'Don't hold your breath for higher rates anytime soon.'
“I don't think they are going to do anything with interest rates before this time next year, and I'm not sure we can even afford a higher, more normalized monetary policy with so much debt,” said Mark Travis, chief executive of Intrepid Capital.
The fact that the nation's unemployment rate is now at the Fed's earlier target for raising interest rates of 6.5% is just the latest indicator of a dovish Fed policy, according to Mr. Travis.
“I think she was notoriously dovish before she became Fed chair, and nothing she has done so far has changed my mind,” he said.
As part of Ms. Yellen's speech at the Jackson Hole Symposium in Jackson Hole, Wyo., she said the U.S. economy is still hampered by the effects of the financial crisis and the
recession that followed. Even as the unemployment rate has declined faster than Fed officials had anticipated, the mindset remains that inflation — as the other half of the Fed's dual mandate — is not currently a concern.
Mr. Travis and others believe the real focus of the Fed is on whether the United States can survive higher interest rates while carrying a record load of $17 trillion worth of debt.
“I think Congress has put the Fed in the position of having to steer the economy with low interest rates,” he said. “There's pressure building, but it's just a matter of whether the Fed wants to address it or not.”
One thing most watchers agree on is that it will be a long time, if ever, before the U.S. economy will be able to handle the historically neutral level of a 4% interest rate.
“I think the real neutral policy rate is around 2%, not 4%,” said Bruce Zessar, managing director at Advisory Research.
“We are in a highly leveraged economy, and the interest burden on debt will get very punitive,” he added. “I think interest rates are likely to go up to 50 basis points next year, but my outlook is that we will be lower longer.”
Mr. Zessar said Ms. Yellen has been tipping her hand by constantly adjusting inflation and unemployment targets, and relying on data that allows for plenty of flexibility.
“She explicitly talked about waiting for wage inflation, but labor is not able to demand as great a share of the pie as it has in the past, so wage inflation is harder to produce,” he said. “A year and a half ago, the Fed was saying they would start raising rates at 6.5% unemployment; now they're saying they want maximum employment and 2% inflation.”
Even the issue of how inflation is being measured and perceived has become a point of contention among those wishing Ms. Yellen could be a bit more hawkish.
“I suppose if you don't eat or drive a car, you could still say there is no inflation,” said Mr. Travis. “At some point the economy is going to take away all the Fed's options and they will have to start raising interest rates.”
Robert Tipp, chief investment strategist at Prudential Fixed Income, is willing to give the Fed a little more leeway.
“The unemployment rate is falling fast, but the Fed is working with a high degree of uncertainty because they don't really know how much unemployment is from the economy and how much is from retirement,” he said. “There's always a risk of the Fed getting behind the curve and it's very tough for [Ms. Yellen] to make a call for six months down the road.”
With that in mind, Mr. Tipp believes Ms. Yellen is doing her best to transparently lay out the issues the Fed is watching.
“They're in a window right now where they are finishing the tapering [of quantitative easing], and they're getting ready to watch and wait for the next six to 12 months to decide whether to raise interest rates, so the best they can do is tell us the things they'll be looking at.”
