Afternoon Must-Read: Tim Duy: Employment Report, Yellen Speech

…if the unemployment rate touches 5% and wage growth and inflation remain anemic? Not my baseline scenario, but I am wondering how patient they will be…. Yellen made some interesting remarks…. ‘As employment, economic activity, and inflation rates return to normal, monetary policy will eventually need to normalize too, although the speed and timing of this normalization will likely differ across countries…. This normalization could lead to some heightened financial volatility…. The Federal Reserve will strive to clearly and transparently communicate its monetary policy strategy….’ Take note of the specific emphasis on financial volatility. The message is that market participants should not expect the Fed to react to every twist and turn in equity markets. More to the point, they expect volatility…. They are signalling that market participants misread the likely path of the Federal Reserve when 2 year yields collapsed last month. That said, I am fairly concerned that the Fed is not taking the flattening of the yield curve seriously enough. I see that as a signal that they have less room for normalization than they might think they have.