VerdeDenver

The market only heard three words from the meeting – ‘about six months’. That puts any potential interest rate hike well into 2014, much earlier than expected. The argument now is whether or not six months was a misstatement and Ms. Yellen needs to be more careful with her words or is she more transparent than Bernanke and spoke her mind. It’s probably a little of both. She may draw a straight line between where she sees the economy now and where she expects it to be in six months but I don’t think anybody else had the same opinion. I’ve never seen a straight line. The market reacted very strongly to what appeared to be a more hawkish Fed. Too many people expecting a dovish tone and the market reacted quite negatively. The markets have remained relatively calm for the past few days so I don’t think the messenger is getting shot this time. It was her first meeting.

With interest rates no longer being tied to specific data and the Fed taking the more qualitative versus quantitative approach, there are some data points however that need to be followed carefully. The unemployment rate, GDP growth and PCE will all be hot topics for the remainder of the year. The Fed anticipates the unemployment rate to end 2014 between 6.1 and 6.3%, 2015 at 5.6 to 5.9% and 2016 between 5.2 and 5.6%. Those forecasts are better than their forecasts from December. Currently the unemployment rate stands at 6.7%. GDP growth is expected to end 2014 between 2.8 and 3.0%, 2015 between 3.0 and 3.2% and 2016 between 2.5 and 3.0%; relatively unchanged from their last forecasts. The revised GDP for Q4 2013 was 2.4% so growth will need to accelerate. Lastly is the PCE (personal consumption expenditures) measure. What’s the difference between CPI and PCE? CPI is an inflation measure based upon the same basket of goods, effectively measuring price changes of the same items. PCE measures price increases over a changing bag of goods, which is a better reflection of price changes adjusted by changing demand. Who cares how much the price of VCR changed if everyone stopped buying VCR’s. Fed expectations for PCE inflation is 1.5-1.6% by end of 2014, 1.5-2.0% by end of 2015 and 1.7-2.0% by end of 2016. The PCE in January for reference was 1.1%, once again inflation needs to pick up some speed.