U.S. Bond Market Week In Review: Deconstructing Yellen

Fed Chair Yellen gave a very important speech last week. While she focused on domestic economic developments, there was also tremendous focus on international events and their potential negative impact on the US economy – a line of analysis championed by Fed President Brainard. Yellen’s latest speech indicates a far more international approach to monetary policy may be taking hold at the Fed. 

Let’s start with Yellen’s assessment of the US economy:

Readings on the U.S. economy since the turn of the year have been somewhat mixed. On the one hand, many indicators have been quite favorable. The labor market has added an average of almost 230,000 jobs a month over the past three months. In addition, the unemployment rate has edged down further, more people are joining the workforce as the prospects for finding jobs have improved, and the employment-to-population ratio has increased by almost 1/2 percentage point. Consumer spending appears to be expanding at a moderate pace, driven by solid income gains, improved household balance sheets, and the ongoing effects of the increases in wealth and declines in oil prices over the past few years. The housing market continues its gradual recovery, and fiscal policy at all levels of government is now modestly boosting economic activity after exerting a considerable drag in recent years.

Employment is a clear bright spot for the US. Unemployment is 4.9%; the average duration of unemployment continues to move lower while the employment/population and participation ratio are inching higher. Weak wage gains – especially considering the expansion’s length — indicate slack still exists.But all things being equal, the employment situation is in decent shape. Consumer spending is also a bright spot.Personal consumption expenditures increased 2.4% in 4Q15, and rose .3% in real terms in the latest monthly report. However, consumption may be topping; real retail and food service sales (which are more sensitive to economic effects) stagnated since July.