Via Stephen Stanley at Amherst Pierpont Securities:<\/p>\n
Chair Yellen\u2019s monetary policy testimony is pretty standard fare.\u00a0 By and large, the structure and tone of her remarks tracks the language of the January FOMC statement, which in most circumstances is exactly to be expected.\u00a0 In the current situation, however, that is noteworthy because financial market expectations for economic growth and monetary policy (domestic and global) have shifted in the last 6 weeks in a meaningful way.\u00a0 While there are dovish elements to Yellen\u2019s testimony, it certainly does not fall into line with the thinking of most market participants.\u00a0 The conversation in the markets has moved from whether the Fed would hike twice or four times this year to whether the next move is a tightening or an ease.\u00a0 Yellen\u2019s speech does not even come close to validating the markets\u2019 thinking.\u00a0 At the same time, she does not explicitly push back against market expectations, which I would take as an implicit signal that the FOMC is prepared to put off the next move beyond March, much as it did in September of last year, in hopes that financial conditions settle down and permit a resumption of \u201cgradual\u201d rate hikes.<\/p>\n
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Yellen begins her remarks by describing the extensive improvement that the economy has enjoyed since she last delivered monetary policy testimony in July 2015.\u00a0 In particular, she focuses on the strengthening in the labor market.\u00a0 She notes that GDP growth slowed in the fourth quarter, but she blames the cooling mainly on weak net exports and an inventory drag, asserting that real private domestic final demand \u00a0\u201chas continued to advance.\u201d<\/p>\n
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From the markets\u2019 perspective, the next paragraph is the pivotal one.\u00a0 She notes that \u201cfinancial conditions in the U.S. have recently become less supportive of growth,\u201d citing equity prices, higher borrowing rates for riskier borrowers, and a stronger dollar.\u00a0 She notes that \u201cthese developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices provide some offset.\u201d\u00a0 This is such a far cry from market sentiments that it bears a little closer examination.\u00a0 First, there is the \u201cif they prove persistent\u201d caveat.\u00a0 This implies that what Yellen and the Fed have seen so far does not rise to the level of substantively changing their economic outlook, at least not yet.\u00a0 Second, there is another caveat in the word \u201ccould.\u201d\u00a0 The markets take it for granted that any tightening in financial conditions risks derailing the expansion, but Chair Yellen suggests that this is only a possibility.\u00a0 Third, using the phrase \u201cweigh on\u201d points to a negative impact at the margin, but it does not necessarily imply that the drag at the margin from tighter financial conditions would be a game changer for growth and\/or inflation.\u00a0 Finally, she follows this statement of heightened downside risks by concluding that \u201congoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending, and global economic growth should pick up over time.\u201d<\/p>\n
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She goes on to elaborate on the variety of downside risks emanating from overseas.\u00a0 There is the uncertainty around China\u2019s economic outlook, which has contributed to \u201cincreased volatility in global financial markets\u201d and has \u201cexacerbated concerns about the outlook for global growth.\u201d\u00a0 This, in turn, has helped to push oil prices lower, introducing risks from the possibility of \u201cfinancial stresses in commodity-exporting countries.\u201d\u00a0 In an effort to be even-handed, she acknowledges that there are also upside risks to growth, though her effort here seems a bit half-hearted.\u00a0 She finishes her assessment of growth risks by noting that the Fed is \u201cclosely monitoring global economic and financial developments, as well as assessing their implications for the labor market and inflation and the balance of risks to the outlook.\u201d\u00a0 This wording is quite similar to the language of the January FOMC statement and certainly is consistent with the \u201cwatchful waiting\u201d mode that I discussed yesterday.<\/p>\n
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She proceeds to describe the inflation situation.\u00a0 She acknowledges that the recent decline in oil and other commodity prices and appreciation in the dollar will keep inflation low in the near term, but she still professes confidence that as oil and import prices stop falling, inflation should rise gradually to the 2% target over the medium term.\u00a0 She talks about inflation expectations, but there is no tone of alarm there.\u00a0 She is fairly dismissive of the decline in TIPS breakevens and describes survey-based measures of inflation expectations as \u201creasonably stable.\u201d\u00a0 Clearly, she is not sweating over every tenth in the University of Michigan (or any other) inflation expectation measure.<\/p>\n
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She finishes by discussing monetary policy, and there is absolutely nothing new.\u00a0 She explains why the FOMC chose to raise rates in December.\u00a0 She emphasizes that policy is and will for some time remain accommodative.\u00a0 She repeats that further increases will be \u201cgradual.\u201d\u00a0 She notes that the neutral funds rate is currently low by historical standards but should rise gradually over time.\u00a0 And finally, she reminds that policy is not on a preset course (a different way of saying \u201cdata dependent\u201d).<\/p>\n
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To me, this word \u201cgradual\u201d is a very significant word.\u00a0 Last year, the word \u201cgradual\u201d was used to limit expectations regarding the pace of rate hikes.\u00a0 It was a dovish construct.\u00a0 But \u201cgradual\u201d has come to be associated with the pace of rate hikes reflected in the dots, i.e. gradual looks much more like the 100 BPs per year rate hike pace reflected in the December dot plot than it does the grand total of roughly 30 BPs priced in by the markets for the next two years!\u00a0 30 BPS over two years strikes me as inconsistent with gradual (\u201cglacial\u201d might be a better word for that!).\u00a0 I think the FOMC continuing to repeat the \u201cgradual\u201d description underscores that they still want to and expect to raise rates multiple times this year (and next).\u00a0 That could change in March, but I doubt it. Going forward, \u201cgradual\u201d may be a hawkish device, in that it could be the main way that the Fed pushes back against the market\u2019s pricing out of virtually all tightening for the next year or two.<\/p>\n
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Much like the January FOMC statement, Yellen\u2019s testimony does a fine job of splitting the difference between seeming oblivious to the financial market developments since the turn of the year and hitting the panic button (as market participants have).\u00a0 By and large, I view her speech as consistent with what I had expected.\u00a0 By failing to push back hard against market expectations that a March rate hike has a virtually zero likelihood, Yellen is implicitly suggesting to markets that the Fed is likely to take a pass in March, though since there is no explicit promise, things could change if the landscape shifts dramatically over the next month.\u00a0 However, I view her message as pushing back harder against the markets\u2019 pricing for later in the year.\u00a0 While the Fed is data dependent and will go where the data take them, she strikes a fairly upbeat tone about the growth, labor market, and inflation outlook, repeating the expectation of \u201cgradual\u201d rate hikes.\u00a0 Fed funds futures contracts this morning have added back all of 5 BPs of tightening by the end of the year, so that basically there is a 50-50 chance of one hike this year.\u00a0 In my view, that is not nearly enough, but there is plenty of time to adjudicate that.\u00a0 Market participants continue to believe that the world economy is in big trouble, while the Fed thinks that recent market turmoil is a passing squall (as it proved to be last summer).\u00a0 So, the battle lines are clearly drawn.<\/p>\n
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One last note: in this particular speech, Chair Yellen is communicating the views of the Committee, not her own opinions.\u00a0 As a result, it is worth listening to her answers to the first few relevant questions from the Committee, as she might give us a glimpse of her own personal views.<\/p>\n
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Via Stephen Stanley at Amherst Pierpont Securities: Chair Yellen\u2019s monetary policy testimony is pretty standard fare.\u00a0 By and large, the structure and tone of her remarks tracks the language of the January FOMC statement, which in most circumstances is exactly to be expected.\u00a0 In the current situation, however, that is noteworthy because financial market expectations […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[1],"tags":[],"class_list":["post-24734","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9YXi-6qW","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/posts\/24734","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=24734"}],"version-history":[{"count":1,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/posts\/24734\/revisions"}],"predecessor-version":[{"id":24735,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=\/wp\/v2\/posts\/24734\/revisions\/24735"}],"wp:attachment":[{"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=24734"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=24734"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/acrossthecurve.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=24734"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}