The Math is Simple: “The Fly” Wins Again

In spite of the efforts of Yellen’s cohorts at the Fed, she struck a dovish tone during today’s speech and the market was elated by it.

However, her thinking is fairly binary with regard to the economy and the role she intends to play in it. It’s almost as if she’s resigned herself to be the fireman. Effectively, she intends to hike rates so that she can lower them later when the economy weakens.

Still, the Fed can hike if the economy grows faster, she said. But if the economy falters, she added, the Fed can “provide only a modest degree of additional stimulus.”

“I consider it appropriate for the committee to proceed cautiously in adjusting policy,” Yellen said in the text of prepared remarks Tuesday. “This caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric.”

“Yellen has doubled down on the dovishness from the March statement and press conference,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. “Global economic developments are cited very prominently.”

Yellen said the FOMC “would still have considerable scope” to ease policy if rates hit zero again, pointing to forward guidance on interest rates and increases in the “size or duration of our holdings of long-term securities.”

“While these tools may entail some risks and costs that do not apply to the federal funds rate, we used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed,” she said.

Stocks are ripping to the upside, with notable weakness still found in basic resources.

Crude is giving zero fucks about Yellen’s speech.

To recap: SPY up + TLT up + XLE down= “The Fly” wins again.