The dollar went up. The dollar went down again. Share prices dropped. Share prices recovered. Yes, it was time for Wall Street to play one of its favourite games: interpreting a speech by Janet Yellen.
Truly, in terms of making her pronouncements cryptic, the most powerful central banker in the world is the daughter and heir to her predecessor but one, Alan Greenspan.
Nothing Yellen has come up with comes close yet to Greenspan’s “I know you think you understand what you thought I said but I’m not sure you realise that what you heard is not what I meant”, but her presentation at the Jackson Hole symposium was a pretty good effort.
On the face of it, the chairwoman of the Federal Reserve made a clear statement of intent. In the light of the continued fall in US unemployment, which has been dropping by an averageof 190,000 a month for the past three months, and the likelihood that growth and inflationary pressures would strengthen, the “case for an increase in the federal funds rate has increased in recent months”.
That could be taken as a hint that US interest rates could rise when the Fed next meets in September. Hence the knee-jerk selloff in shares and the jump in the dollar because dearer borrowing costs are seen as bad for corporate profits but good for attracting investors into the greenback.
If only things were that simple. A closer textual analysis showed Yellen saying that the Fed continues to “anticipate that gradual increases in the federal funds rate will be appropriate over time” to hit its targets for jobs and inflation. What’s more, she stressed that decisions would depend on future economic news.
This suggests that the Fed is actually in no real hurry to raise rates, a view that is supported by the way in which the US central bank has shied away from raising borrowing costs in the first half of 2016 amid disappointing data. Figures released on Friday showed that the world’s biggest economy grew at an annual rate of just 1.1% in the second quarter, a slight downward revision from the initial estimate of 1.2% .
So what Yellen is actually saying is that US interest rates could rise later this year, most likely in December, provided nothing nasty and unexpected happens in the meantime to make the Fed change its mind.
