Morning Must-Read: Cardiff Garcia on Janet Yellen

Cardiff Garcia: Yellen’s words vs what you heard: “[Yellen] doesn’t think inflation will threaten to breach the 2 per cent level so long as unemployment is ‘quite high’.

This could be read either hawkishly or dovishly. The potentially hawkish interpretation is… that such language reinforces the implicit, extant policy of 2 per cent as an inflation ceiling…. The dovish reading is that if she doesn’t think this tradeoff is likely to be an issue, then it’s because she also thinks there is more labour slack than the unemployment rate is communicating…. It’s also possible to mash together the two interpretations: policy will stay looser for longer, but only because the health of the labour market is worse off than the unemployment rate suggests. No change relative to the status quo on the hawkish-dovish spectrum…. Markets gravitated instead to two hawkish signals. One was the median forecast for the federal funds rate at the end of 2015 and 2016…. The other hawkish signal was Yellen’s definition of what constitutes ‘a considerable time after the asset purchase program ends’ before the first rate hike… ‘on the order of around six months’…. As for the rest of the presser, I believe this extended passage was especially important:

I have talked in the past about indicators I like to watch or I think that are relevant in assessing the labor market. In addition to the standard unemployment rate, certainly look at boarder measures of unemployment…. U6… five percent of the labor force working part time on an involuntary basis… is an exceptionally high number… discouraged and marginally attached workers… immensely high and can be very stubborn in bringing down… a cyclical component in the fact that labor force participation is depressed… quit rates now are below normal pre-recession levels… hires rate, however, remains extremely depressed… wage growth has really been very low…