Yellen’s language hints concern over subdued inflation
In a written testimony to lawmakers yesterday, Federal Reserve (FED) chairperson Janet Yellen used subtly different language that suggests she is more concerned over recent “softness” in inflation than she was a month ago. She noted declines in “certain categories of prices” (a reference to price drops for mobile telecommunications services and pharmaceuticals), and suggested lower inflation was “partly the result” of them.
In early June, Yellen was more positive about the transitory nature of lower inflation, saying it was driven “significantly by what appear to be one off reductions in certain categories of prices”.
In other words, lower inflation is now seen as only “partly the result” of declines – a month ago, it was “significantly” the result, and those declines were “one off”.
The U.S. economy has been expanding for nine years, and it continues to add to the job market with little change to inflation. Stronger demand for labour has not translated into real wage growth, and the FED’s “preferred gauge of price pressures has remained stuck under its 2% target for most of the last five years.”
However, while many observers today were concerned by Yellen’s more cautious tone, Dominion investors may have been less surprised. The persistence of inexplicably low inflation is something that Dominion’s chief investment officer, Arjen Los, tackled in his Economic outlook for July two weeks ago. Writing then about how investors should respond to this situation, Mr. Los wrote:
“What if inflation remains low for a prolonged period? The most likely scenario, under those circumstances, would be a more gradual normalization process with interest rates remaining lower for longer than central banks are currently planning. It is instructive to observe that, according to the CME FedWatch tool, the probability of a US rate hike in September has fallen to below 20% from more than 90% at the beginning of June. This scenario, although still somewhat speculative, would be positive for equities and growth stocks (which are more sensitive to the level of discount rates) in particular.”
The opinions in this article do not reflect those of Dominion Fund Management Limited, and in the instance of any forward-looking statements, these should not be construed as advice.
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