Fed Chair Janet Yellen said, in her prepared remarks at the Jackson Hole symposium, that “Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.” The markets did not believe her.
Within thirty minutes, the Dow Industrials were up 100 points and gold was up $16 and silver up just short of fifty cents. Why did the market ignore Yellen’s warnings of future rate hikes?
Probably because the Fed has lost credibility, after having indicated rate hikes earlier this year but not following through. (Has the Fed become the boy who cried wolf?)
Further making a rate hike difficult was the GDP increase of only 1.2% in the second quarter, combined with a downward revision to the first three months of the year to produce an average growth rate of only 1% over the last 12 months. The second quarter GDP increase was well below the accepted forecast of 2.6%.
Had the markets believed Yellen’s warning, both would have sold off immediately and would have sold off big. Speculation is that there will be a rate hike at the September FOMC meeting. I doubt it. An economy growing at only 1% is not a climate in which the Fed is likely to raise rates.