Yellen: What Does She Mean For The Markets?

Market participants have been eagerly awaiting the FOMC Minutes of January’s committee since Janet Yellen made her debut as Chairman at the House of Representatives last week.

One thing participants were keen to see was whether the poor data published in the last few weeks has influenced FOMC decisions. For example, the chart below shows the recent deterioration of the Macro situation in the USA.

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As usual, the FOMC minutes are scrutinised by “FED watchers” who want to gain an understanding of the policies discussed and determine possible future changes in policy and/or target.

January’s minutes highlighted two main areas that are important for investors:

1. Hawkish tone

The minutes show that the taper has continued as planned in last December’s conference. This suggests that FOMC has not been influenced by bad data (yet).

2. “Strange” Shift in Forward Guidance

Members agreed that FOMC would need to change its forward guidance as unemployment rates approach 6.5%. However, no general consensus was reached on the kind of change that would be required.

For now, it was suggested that forward guidance should be replaced by risks of financial stability, as you can see from the lines below, taken from the FOMC minutes:

“Several participants suggested that risk to financial stability should appear more explicitly in the list of factors that would guide decisions about the federal funds rate once the unemployment rate threshold is crossed.”

And

“Several participants argued that the forward guidance should give greater emphasis to the Committee’s willingness to keep rates low if inflation were to remain persistently below the Committee’s 2 percent longer-run objective.”

Perhaps the most interesting thing to observe following the release of the FOMC minutes is how markets react to interpret future scenarios.

For example, we can see from the chart below that the release of the FOMC minutes pushed the US Dollar higher due to the hawkish tone shown.

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The minutes also had an effect on the price of gold, which was pushed lower, but since recovered all losses.

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Stocks also fell with the help of poor Chinese PMI, but since rose sharply and recovered their pre-minutes level.

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To sum up, the FOMC minutes of the first meeting with Yellen as chairman had a positive influence on the US Dollar, which rose due to the hawkish tone. Stocks and commodities seemed to be complicated by the new forwards guidance: bears seemed to become stronger, supported by the Chinese PMI, but the trend has since reversed and all losses have been recovered.

It is very difficult to forecast what will succeed in the markets. It’s likely that the US Dollar will become stronger according to FED policy, while stocks, pushed by three rounds of QEs, are hard to predict. Their movement will depend on several factors: new forward guidance, American data and the situation of emerging markets.