Preview: 6 Points To Expect From Fed Yellen's Testimony - Nomura
Yellen says equity declines and dollar strength could weigh on economic activity Highlights from Yellen's statement
- Inflation continues to run below the (FOMC) Committee's 2 percent objective
- The Committee did not adjust the target range in January
- U.S. GDP is "estimated to have increased about 1-3/4 percent in 2015
- The low average pace of inflation can be traced to earlier steep declines in oil prices and in the prices of other imported goods
- The Committee expects inflation to remain low in the near term
- Low oil prices will boost economic growth more than we expect."
- Financial conditions in the United States have recently become less supportive of growth, with declines broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar."
- FOMC participants' projections of the appropriate federal funds rate over the next three years generally shifted to lower values
- The median projection now stands at 1.4 percent at the end of 2016, 2.4 percent at the end of 2017, and 3.3 percent at the end of 2018.
- Economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate
- The economy could grow more rapidly or that inflation could increase more rapidly
- If the economy were to disappoint, a lower path of the federal funds rate would be appropriate
- Unemployment rate fell to 4.8 percent in January, 0.8 percentage point below its level a year ago
- These measures remain above the levels seen prior to the recession, suggesting that some slack in labor markets remains.
- One area of particular strength has ben purchases of cars and light trucks; sales of these vehicles in 2015, reached their highest level ever
- Homebuilding activity has continued to move up, on balance, although the level of new construction remains well below the longer-run levels implied by demographic trends.
- Foreign economic developments, in particular, pose risks to U.S. economic growth
- Low commodity prices could trigger financial stresses in commodity -exporting economies
Yellen: We should look at negative rates for prudent planning Bill rates can go negative without negative Fed rates
- Fed in 2010 was concerned negative rates wouldn't work
- Taylor Rule would suggested 2.50% overnight rate, we think that's too high
- We take our employment mandate extremely seriously
The Fed can see which way the wind is blowing on negative rates. Today's 'prudent planning' is tomorrow's inevitability.
More:
Fed hike odds edge higher after Yellen Market still sees no further moves in 2016
The implied chance of a hike by December of this year rose to 37% from 30% after the first day of Yellen's Humphrey Hawkins appearance, according to fed funds futures.
The implied chance of a hike in March is just 2%, down from 50% in December.
A hike isn't fully priced in until June 2017.
The market is increasingly convinced that the Fed hawks are wrong about almost everything.
Yellen: Extent of US dollar strength not anticipated by Fed Yellen comments in Day 2 of Humphrey Hawkins:
- Stronger dollar has helped hold down inflation
- Fed is watching developments very carefully
- Fed has been surprised by oil drop
- Fed evaluating how markets may influence economy
- It's premature to make a judgement, we meet in March
Premature? It's your job. Is she waiting for a bird to fly in the window at the March FOMC and whisper to her what's going on?
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On Wednesday and Thursday, Federal Reserve Chair Yellen will deliver her semiannual report on monetary policy in testimony before the House Financial Services Committee and the Senate Banking Committee. (We expect her written testimony to be released at 8:30am Wednesday and her testimony will begin at 10:00am.)
Yellen has a tough job. The performance of financial markets and the economy since the FOMC raised rates in December has almost certainly not been what the FOMC expected.
Financial conditions have tightened and the economic data suggest some loss of momentum. Those trends were evident when the FOMC met in late January. We expect Yellen to stick close to the message conveyed in the January FOMC statement. However, the situation has evolved since the FOMC last met, and we expect Yellen to indicate as much.
We expect Chair Yellen to make the following points:
1- Since December, financial conditions have tightened materially, driven primarily by developments abroad. How long this will last is unclear. The recent stress affecting banks is a new development.
2- The economic data received since the December FOMC meeting suggest somewhat slower growth than the Committee had expected, even before any potential impact from tighter financial conditions.
3- Recent declines in oil prices, and to a lesser degree the appreciation of the dollar, will affect the trajectory of inflation.
4- The Committee is watching these developments very carefully.
5- Increased uncertainty about the outlook could affect decisions at upcoming meetings. (This would be a way to acknowledge that the Committee’s expectations for a hike in the near term have fallen.)
6- Nonetheless, the Committee is cautiously optimistic, consistent with its forecasts about the medium-term outlook. We expect Yellen to push back against any suggestion that the economy is in, or approaching, a recession.
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