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Doves may be disappointed by Fed’s Yellen
From the Financial Times of Tue, 16 Dec 2014 12:01:29 GMT

The US Federal Reserve will deliver its final monetary policy decision of the year on Wednesday, followed by chairwoman Janet Yellen’s press conference.

Will the Fed drop its pledge to keep policy loose for a “considerable period”, thus laying the groundwork for a rate rise, expected by mid-2015?

Many in the market expect so.

However, over the past several days chatter has built that perhaps recent energy/Russia-induced market wobbles and more signs of a China slowdown will make the Fed err on the more dovish side.

In particular, might Ms Yellen make a reference to the disinflationary pressures from cheaper energy costs and the stronger dollar, which this month hit a five-year high?

There are two reasons why those hoping for an aggressively dovish stance may be disappointed.

First, the Fed will be more concerned about core inflation, which strips out the volatile energy component. Consider: is current lowflation transitory or persistent?

Second, the Fed will have noted that alongside good industrial production data released this week was news that industrial capacity utilisation had risen above 80 per cent.

Strategas Research says inflation is not currently a concern but a sustained rise in price growth tends to take hold when the operating rate, as it is also known, hits 85 per cent.

Meanwhile, it is worth noting that the 10-year Treasury yield is about 20 basis points lower than it was before this month’s blowout US jobs report.

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