Decoding Yellen's Message

Authored by 720Global's Michael Lebowitz via,

“I know you think you understand what you thought I said, but I’m not sure you realize that what you heard is not what I meant – Alan Greenspan

On July 12, 2017 in her semiannual testimony to Congress, Janet Yellen stated the following:

“The Federal Funds rate would not have to rise all that much further to get to a neutral policy stance.”

Currently the target for the Federal Funds rate is a range of 1.00-1.25%, having been raised four times since December 2015. Despite the increase from the zero level that persisted for seven years following the “Great Financial Crisis,” it is still at microscopic levels as shown below.

Data Courtesy: St. Louis Federal Reserve (FRED)

Per Janet Yellen’s comment, the “neutral policy stance” is another way of saying that the Fed funds rate is appropriate or near appropriate given current and expected future economic conditions.

Said differently, Janet Yellen is admitting what 720Global has been saying for years – the economy has been stagnant, is stagnating and will continue to stagnate.

If we assume that Yellen is referring to a range of 1.25-1.75% as an appropriate Fed Funds rate, based on statistical analysis of data since 1955, we forecast that real GDP growth rate is likely to average somewhere between 2.00-2.50% for the foreseeable future. For perspective, the graph below plots the range of expected GDP growth vs historical secular (3-year average) GDP growth. In years past, such a slow rate of growth (highlighted in yellow) was considered nearly recessionary.

Data Courtesy: St. Louis Federal Reserve (FRED)

A similar analysis comparing Yellen’s “neutral” Fed funds rate versus inflation (CPI) yields inflation expectations of approximately 1.75%. Again, such an inflation rate is emblematic of a stagnant economy.

We are gratified that Janet Yellen is finally coming around to our perspective and only sorry that it has taken her the entirety of her tenure to do so. Unfortunately, the levels of growth to which she conceded in this testimony imply further challenges for the economy due to the large debt overhang, weak fundamentals supporting overvalued financial markets and higher risks of recession.


Today’s comments are not a revelation. The Fed is currently forecasting long term economic growth of 1.90%. Those trading on hope and momentum are translating her message as a green light to buy stocks because the Fed will remain ultra-accommodative.

While it is nice some see a silver lining in her message, one must remember that equity valuations are perched at levels that imply tremendous economic and earnings growth. If what Yellen is saying is true, equity holders are grossly overpaying for a stream of future earnings that will most certainly be disappointing.

Conversely, the message in Yellen’s testimony is bond friendly. In fact, we argue that continued stagnation and weak price growth could result in even lower yields than those we have seen over the past five years.


hedgeless_horseman Thu, 07/13/2017 - 10:38 Permalink


“The Federal Funds rate would not have to rise all that much further to get to a neutral policy stance.”


“Planned maintenance on the US Treasury's Heidelbergs should be done in a few weeks.”
NoDebt E-Knight Thu, 07/13/2017 - 10:50 Permalink

I was mocked when I said we should indicate how well the economy is doing as an interest rate, not as GDP growth.  For instance:  How's the economy doing?  Oh, not so great, I'd say we're at about -2% interest rate.And now I give you this:"Said differently, Janet Yellen is admitting what 720Global has been saying for years – the economy has been stagnant, is stagnating and will continue to stagnate."Janet's stupid "neutral policy rate" = NoDebt's stupid rate-based economic conditions indicatorWhen it comes to stupid ideas, I might not be the best, but I'm ALWAYS first.Stick with me, kids.  You'll make millions!  (And give them all right back again.) 

In reply to by E-Knight

nope-1004 NoDebt Thu, 07/13/2017 - 10:59 Permalink

That's because with low interest rates, or when the price of money is debauched, the time factor is eliminated from free market efficiency.  Entrepreneurial spirit dies, as the focus turns from efficiency and ingenuity to making payments.  The human is inherently a little lazy, so removing the time component from money kills the economy.  Low interest rates kill the economy, except the grand lie is that it's good for everyone because your payments are low.  Truth is, principal cost of assets is always lower under a high interest rate regime, and the opposite effect of asset bubbles form under low interest rates.  We are being systematically enslaved and killed.  This is serious and no one wants to acknowledge the currency debauchery.Doesn't take a PHD to figure that out.  Except the Fed doesn't care about that little tidbit, they're into controlling you and I and all the other nations of the world through money.It's satanic at its core.  The people need to take to the streets and literally overthrow all these evil moneymen by hanging them from lamp posts.  Currently, the sytem is designed around payments and credit rating, when in fact it should be called enslavement via the slavery index.Personally, I'm sick of it.  To you the reader, everyone else is too except you.

In reply to by NoDebt

LawsofPhysics This is it Thu, 07/13/2017 - 11:14 Permalink

True, but it will preserve wealth and opportunies for your children.  Don't be so selfish.  PMs remain the prefered collateral, period, regardless of the "fiat du jour". No shit no one lives forever, but this doesn't mean you should willingly be a fucking idiot either. You won't beable to do good things if you don't have a purchasing power, period.

In reply to by This is it

khakuda Thu, 07/13/2017 - 10:39 Permalink

And come Feburary, she will be making speeches for $250,000 a pop.Great life.  Create bubbles and increase wealth disparities by keeping rates below inflation and then cash in.

LawsofPhysics Thu, 07/13/2017 - 10:43 Permalink

Regardless, only the bankers and financiers have access to free money via NIRP/ZIRP, why not give EVERY productive person/LLC THE SAME ACCESS!!!!See the problem yet motherfucker?"Full Faith and Credit"

Honest Sam Thu, 07/13/2017 - 10:53 Permalink

Imagine that.  A FED chairperson being inscrutable.You have to give them credit for one thing:  their humility.They could, if they chose to exercise their hubris slow twitch muscles, just tell the whole world to..."Fuck the hell off and sit their assholes on a hot poker".  But they don' go girl.....

CPL Honest Sam Thu, 07/13/2017 - 11:46 Permalink

You actually believed any of her nonsense?  Her apology is far too late, everyone's bowls are empty and she needs to be made as an example of.  Why?  Why not. <Black bag Janet and her family!><Break the theiving banker's hips><Use a sledge hammer while she's straped down><Dump her body in the sewer tunnels><Jazz Hands!>

In reply to by Honest Sam

Golden Showers Vinividivinci Thu, 07/13/2017 - 19:36 Permalink

“The Federal Funds rate would not have to rise all that much further to get to a neutral policy stance.”“Ethay Ederalfay Undsfay ateray ouldway otnay avehay otay iseray allyay atthay uchmay urtherfay otay etgay otay ayay eutralnay olicypay ancestay.” was looking for a Mr. T translator. Can anyone find one? Still the translation is kind of lame... except for the isera(el)y part.

In reply to by Vinividivinci

Herdee Thu, 07/13/2017 - 11:28 Permalink

Endless foreign wars are bankrupting America. It's the world empire-hegemony program people. You have structural problems in society. And no, everybody else in the world doesn't want to live like Americans or be run by them.

Rene-Paul Thu, 07/13/2017 - 13:54 Permalink

new nope-1004, You hit the nail on the head.I was a young, ignorant,stupid GI in Saigon in december of 1968. I could see the debauchery/ debasement of of the prohibited US dollar,the military payment certificates,aka MPC and the local Viet Namese currency,aka dong/piaster.Time value of money, interest; What is that again?, I forgot.Brgds,Rene

Able Ape Thu, 07/13/2017 - 16:20 Permalink

Actually, the proven way to forecast the direction of the economy is to analyze the wrinkles around Janet's asshole.  Yeah, it's a nasty job but someone does it each month to divine the future....