Fed Chair Janet Yellen is scheduled to make a speech to the World Affairs Council of Philadelphia today at 12:30 ET.

“Markets will be waiting with bated breath to see whether she strikes a more hawkish tone or one of continued cautiousness ahead of the June FOMC meeting,” said economists at Bank of America.

“We will have to listen carefully for her analysis of what definitely is a deterioration of the labor market conditions,” economists at BNP Paribas wrote in a note.

Why listen at all?

Echoing similar sentiment, Joseph Calhoun at Alhambra Investment Partners asks What Now, Ms. Yellen?

Well, that was ugly. The lousy employment report released this past Friday threw the markets and probably the FOMC for a loop. Stocks didn’t really do anything – yet – but other markets more than made up for that minor oversight. The dollar was down 1.5% on the week, all of that after 8:30 Friday morning. Gold was up 2.57% on the week with all of that coming, again, after the Labor Department reported the sour state of the labor market. The 10 year Treasury yield, which flirted with 1.9% early in the week finished 20 basis points lower, around 1.7%, a drop in yield of nearly 6% in one day.

And so once again, the Fed finds itself with egg on its face, hoisted by its own petard of forward guidance. As I’ve said numerous times over the last few years, forward guidance – what other kind of guidance is there by the way? – is only as good as the Fed’s forecasting ability. Which is, sad to say, not very good. Forward guidance has itself become the destabilizing force, a source of volatility rather than a dampener, creating uncertainty rather than providing the opposite. It is hard to believe markets would have had to adjust so sharply Friday if the members of the Fed had just been silent the last few weeks.

If the Fed is truly data dependent, willing to adjust policy only if the economic data supports the notion, then they will be hard pressed to do anything other than sip coffee and eat doughnuts at their meeting next week. It does not require much analysis to see the economy is not hitting on all cylinders and is a lot closer to recession than the Fed can admit. The employment report that moved markets so quickly is but one of many stats trending in the wrong direction. One need not take my word for that. The bond market is a better economic prognosticator than anyone at the Fed or on Wall Street or at Alhambra ever will be and it is saying pretty loudly that the economy stinks. The 10 year Treasury is not trading at 1.7% because everything is hunky dory.

Damage Control

Yellen’s June 6 speech was a last minute scheduling, conveniently placed just ahead of the blackout period in front of the June 15 FOMC meeting.

Just four days ago, most of the world (me not included), thought Yellen would be yodeling the glories of a US economy that had reached “escape velocity” or similar such Keynesian nonsense.

Instead, Yellen will now seek damage control on Fed credibility. The irony is rather remarkable.

The 10 year Treasury is not trading at 1.7% because everything is hunky dory.


For further discussion please see US Treasury Bull Market Over?

Mike “Mish” Shedlock