The main takeaway, in our view, from Chair Yellen’s comments before the Economic Club of New York, is that a combination of higher external risk factors, downward revisions to committee member’s estimates of the long-run policy rate, and the asymmetry of monetary policy at the zero lower bound caused the committee to turn more cautious at its March meeting.
Her comments stand somewhat in contrast to recent remarks by other FOMC members and are more clear in respect to downside risk factors and their possible effect on the outlook for activity and inflation. Hence, we see the chair’s comments today as an effort to exert control over the message and, in doing so, tilt expectations for policy rate hikes in a decidedly dovish direction.
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We maintain our view that the Fed will raise its policy rate twice this year, in June and December, but risks to our call remain skewed to fewer hikes, particularly if market concerns around the upcoming UK Referendum vote keep financial conditions tight through mid-year. Our policy rate forecast is predicated on our view that external risk factors will not unduly influence domestic activity, allowing for a continued decline in the unemployment rate and a gradual building of inflationary pressures.
