Fed Chair Yellen Attempts to Calm Nerves after Weak NFP Report - MUFG
Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has remained on a weaker footing in the Asian trading session following yesterday’s speech from Fed Chair Yellen which signalled more caution over resuming rate hikes in the near-term.
“Fed Chair Yellen backed away from providing calendar-based timing over the potential timing of the next Fed rate hike by dropping the phrase from her previous speech that she thought it would probably be appropriate to raise rates “in the coming months”. Instead, Fed Chair Yellen simply stated that “I continue to believe that it will be appropriate to gradually reduce the degree of monetary policy accommodation provided that labour market conditions strengthen further and inflation continues to make progress toward our 2 per cent objective.”
The comments clearly signal that the Fed does not intend to raise rates this month and while not entirely ruled out yet it looks less likely now that it will resume rate hikes in July as well. It leaves the US dollar more vulnerable to the downside in the near-term.
Fed Chair Yellen acknowledged that the weak employment report for May was “concerning” although highlighted that no one data point was definitive and other labour market indicators were more positive. As a result the Fed “will need to watch labour market developments carefully.” Fed Chair Yellen stated that weakening employment growth may reflect that businesses may have decided to expand more slowly as evident as well by the recent weakness in capital investment even excluding energy, although she still expects the weakness to prove transitory.
Other reasons for caution cited by Fed Cahir Yellen included the Brexit referendum which could have “significant economic repercussions”, and low inflation expectations which have “moved enough to get my close attention”.
Overall Fed Chair Yellen struck a cautiously optimistic tone stating
there were “good reasons to expect that the positive forces supporting
employment growth and higher inflation will continue to outweigh the
negative ones.” She noted that recent limited data for Q2 suggested a
“significant step-up in consumer spending and GDP growth this quarter”
and looking further out, said she expects consumer spending to grow “at a
solid rate” and for housing to “make further progress” with oil-related
investment becoming less of a drag though trade would continue to
restrain growth over the medium term. For the first time as well Fed
Chair Yellen stated that “I believe we are now close to eliminating the
slack that has weighed on the labour market since the recession.”
Ultimately, the incoming economic data will determine whether the Fed
will remain on course to resume gradual rate hikes later this year.”