For the Fed, Wrong is Better than Stupid

Yellen joins the rate-hike chorus, saying “in the coming months…a move would be appropriate,” but that the Fed would proceed “gradually and cautiously.” Considering that the most recent FOMC statement said “growth in economic activity appears to have slowed,” this is an epic flip-flop. We still don’t think there will be a hike at least until December, with “cautiously” ruling the day. If the Fed does hike, we take back our over-excited call for markets to “unravel.” At December liftoff, the economy was visibly falling into recession, and the Fed was lying about it. This time the economy is accelerating out of what turned out to be a mini-recession, so a hike will be unhelpful, but less deleterious than last time. Accelerating earnings give stocks scope to rally, and long-term yields should stay low, with the Fed’s saber-rattling only adding to deflationary expectations. Rising oil prices should keep USD from getting too strong.