The reference of 19 ways to leave your lover is a reference to Janet Yellen’s Labor Market Condition Index (LMCI), which is what the Fed chair noted as the most important “dashboard” for measuring SLACK in the labor market. To achieve a true measure of labor market slack it is important for the Fed to dig deep into the statistical data of the unemployment report giving the Fed latitude in its decision-making. Remember, the Fed has twice moved the parameters of the jobs data as the different thresholds established by the Fed were breached quicker than anticipated. First it was an unemployment rate of 7 percent and then moved again to 6.5 percent. The threshold was then moved lower again as slack and its impact on WAGE PRICES was deemed to be the best measure of the health of the jobs market. If the Fed’s focus is wages then the FOMC statement tomorrow should be unchanged as the recent data has continued to reflect that wage gains are stagnant.
I AM GOING ON THE RECORD: Today, Jon Hilsenrath released a webcast and suggested that Chair Yellen will announce that the FOMC will continue its use of forward guidance and its key phrase of CONSIDERABLE TIME . Upon the release of Hilsenrath’s piece, all risk assets RALLIED in sync with the DOLLAR SOLD OFF. The market seemed to be relieved that the continued use of CONSIDERABLE TIME would mean the Fed would keep interest rates lower for longer. I AM GOING TO OPINE THAT THE FOMC WILL REMOVE THE CONSIDERABLE TIME PHRASE AND LEAVE THE PHRASE “SIGNIFICANT UNDERUTILIZATION OF LABOR RESOURCES” in the FOMC statement. It was only at the last meeting that the Fed introduced us to the underutilization phrase.
The underutilzation of labor resources provides the Fed with more flexibility in its timing of when to move rates. A considerable period is to constraining and confusing for the market so it is time to say goodbye to FORWARD GUIDANCE. Recently, Fed hawks and doves have been critical of the “considerable time” phrase and it was Fed President Plosser who was opposed at the previous meeting because of the rigid nature of forward guidance.
More importantly, Vice Chairman Stanley Fischer has long been critical of forward guidance and he is the mentor of most of the world’s key central bankers. In a Wall Street Journal piece from September 23, 2013 (prior to his nomination for Vice-Chair), Fischer said: “You can’t expect the Fed to spell out what it’s going to do. Why? Because it doesn’t know.” We don’t know what we’ll be doing a year from now. It’s a mistake to try and get too precise. Further, Fischer noted, “If you give too much forward guidance you do take away flexibility.” SO IT IS TIME FOR THE YELLEN FED TO REMOVE THE MOST INEFFICIENT TOOL IN ITS TOOL BOX. BY REMOVING THE CONSIDERABLE TIME phrase YELLEN CAN BE A LITTLE HAWKISH WHILE REMAINING FULLY COMMITTED TO PROVIDING THE BACKDROP FOR A LIFT IN WAGES. A SIGNIFICANT UNDERUTILIZATION OF LABOR RESOURCES is a much more powerful policy framework than just a considerable time period.
The problem from a trading perspective is that Hilsenrath moved the markets for a no change from forward guidance so be prepared for increased volatility, if Notes From Underground is correct. Be patient though as there is a Yellen press conference 30 minutes after the FOMC release. If forward guidance is removed it should get Chair Yellen a unanimous vote on policy and even the HAWKS will be able to live with the “underutilization” phraseology.
“You just slip out the back,Jackmake a new plan, STANyou don’t need to be coy, Royjust get yourself free,Hop on the bus, GusYou don’t need to discuss muchJust drop off the key, LeeAnd get yourself free.”