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Fed: Yellen warns against raising rates too quickly - BBH

Analysts at BBH point out that at a speech in NY late yesterday, Yellen warned against raising rates too quickly and repeated her sense of mystery over the decline in inflation this year.  

Key Quotes

“The US two-year yield softened marginally, and the Fed funds futures rose.  At 1.295%, the implied yield of the December Fed funds futures contract is precisely at what we think is fair value assuming a rate hike at the next FOMC meeting.”  

“There seems to be some confusion over what Yellen means, though she may very well be the most plain-speaking Fed Chair.  She is not referring to structural influences.  She is referring to the recent decline.  Specifically, core CPI fell from 2.3% in January to 1.7%, where it was from May through September before ticking up to 1.8%.  The targeted core PCE deflator fell from 1.91% last October to 1.30% in August before rising to 1.33% in September.  It is this decline she regards as mysterious but sticks to the working hypothesis that the decline is due to a number of idiosyncratic factors.”  

“Some reports play up Yellen's dovish warning but accuse her of being too hawkish when the Fed last hiked rates in June.  Others suspect that her caution against raising interest rates too fast is a signal to her successors at the Fed.  Still others are linking her dovish comments to the risk that the minutes from last months' FOMC meeting that will be released this afternoon will show some officials concerned about an undershoot of unemployment.  Recently there has been some evidence of greater wage increase for employees in some sectors, including what are regarded as blue-collar occupations.” 

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