Get set everyone, a new guessing game in the markets is about to begin.
It’s called “What will Yellen do?” and the main idea of the game is to try and figure out what new US Federal Reserve chairwoman Janet Yellen will do at her first post-policy review press conference after taking office in early Feburary.
More specifically, will she ditch the 6.5% unemployment rate in the forward guidance, currently viewed as the threshold for a possible hike in interest rates?
(Whether she will continue with the Fed taper isn’t so much of a question: there really doesn’t seem to be any reason why she won’t continue with the $10 billion a month tapering).
The jobless rate has been hovering dangerously close to that threshold (announced earlier by the Fed) for some time now. But given the still fragile state of the economy, the Fed can’t raise the interest rate without snuffing out the recovery it is trying so hard to nurture.
So, in a way, that 6.5% target has become redundant. And the markets know that.
The question is, will that target be officially dumped next week?
It seems likely, and the bet among some leading investors is that Yellen might opt to introduce a slew of economic indicators instead of sticking to one labour market indicator (similar to what the Bank of England did recently) or ditch the 6.5% target completely in favour of more “qualitative” guidance.
In any case, the change will be significant. The Fed holds its policy review meeting on March 18-19.
Ladies and gentlemen, place your bets now please.