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March rate-hike expectations have risen to their historical highs... (around 36%)
Longer-term Treasury yields took another leg higher as Yellen talked about the Fed's balance sheet.
Bank stocks are leading post-Yellen with bonds and bullion lower... The broad stock indices are unchanged...
Utes, Tech, and Energy are weighing on indices, only banks are higher...
Treasury yields are now higher across the entire curve year-to-date...
Is March live? That is what Sen. Dean Heller (R., Nev.) wanted to know when he asked the Chair "Is the Fed going to raise rates in March?"
Yellen responded with a variation on the language she used in her prepared testimony: The Fed will look at the proper stance of policy "at our upcoming meetings." Every meeting is live, she said, but she can't say precisely when the Fed will act—though the Fed does expect it will raise rates this year. She said, decisions on rates will be driven by trends in the economy, not speculation about potential changes in fiscal policy.
“Precisely when we would take an action, whether in March or May or June, I know people are focused on that,” Yellen said adding “I can’t tell you exactly which meeting it would be. I would say that every meeting is live.”
Heller tried several times to get Ms. Yellen to weigh in on specific policy proposals, including a border-adjusted tax, but she smiled and said that those decisions belong to Congress.
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Key Q&A Responses:
- YELLEN: WOULD ANTICIPATE BALANCE SHEET EVENTUALLY MUCH SMALLER
- YELLEN: FED DOESN'T WANT TO USE BAL SHEET AS ACTIVE POLICY TOOL
- YELLEN: FOMC TO DISCUSS BALANCE SHEET STRATEGY IN COMING MONTHS
- YELLEN: FOMC'S LONGER RUN GOAL IS TO SHRINK BALANCE SHEET - BBG
Update: Why did the dollar and Treasuries react as if stung moments after Yellen's prepared remarks were released?
Because according to a cursory scan of her speech, she was more hawkish than most expected, arguably making a March rate hike "live" after warning that "as I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession."
Further hawkishness emerged from her claim that "Incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the Committee’s expectations. At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate."
Yet to offset that hawkshness, Yellen cautioned that the US economy and fiscal policy face an uncertain path under the administration of Donald Trump, as she played down any expectations of a March rate rise and declared “monetary policy is not on a preset course”. In prepared remarks for her Valentine’s Day testimony Ms Yellen also struck a note of caution about the new administration and expectations that its plans for tax cuts, infrastructure spending would lead to looser fiscal policy and more rapid growth.
Indeed, looking at the Fed Funds market, March, the increase so far has been some what tepid, with odds increasing from 30% before, to 36% after Yellen's prepared remarks.
“Considerable uncertainty attends the economic outlook,” she said, pointing to “possible changes in US fiscal and other policies” as one of the main sources of that uncertainty alongside questions about productivity growth and international developments.
She added that any future moves, Ms Yellen said, would depend on continuing progress in both US employment and inflation, which at 1.6 per cent remains below the Fed’s 2 per cent target rate.
“The economic outlook is uncertain, and monetary policy is not on a preset course,” she told members of the Senate Banking Committee, adding that “changes in fiscal policy or other economic policies could potentially affect the economic outlook,” she said, adding that “it is too early to know what policy changes will be put in place or how their economic effects will unfold”.
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Here are the speech higlights, courtesy of BBG
- Yellen says incoming data indicates labor market conditions continue to strengthen and inflation is moving to 2%.
- “At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” she says in prepared testimony for a Senate Banking Committee hearing
- “Waiting too long to remove accommodation would be unwise,” Yellen reiterates
- Discussing the balance sheet, she says committee has continued policy of reinvesting
- “This policy, by keeping the Committee’s holdings of longer-term securities at sizeable levels, has helped maintain accommodative financial conditions”
- Says monetary conditions are accommodative, which supports “some further strengthening” of labor market conditions and a return to 2% inflation
- Says FOMC expects economy to continue expanding at “moderate pace” as job market strengthens “somewhat further” and inflation gradually increases to 2%
- “The economic outlook is uncertain, and monetary policy is not on a preset course,” she says, adding uncertainties include possible changes in fiscal and other policies, the path of productivity growth and intl developments
- It’s too early to know what policy changes will occur or how their effects will unfold, she says
- Yellen highlights importance of improving the pace of longer-run economic growth and raising living standards with policies designed to improve productivity
- Says she hopes fiscal changes will be consistent with putting fiscal accounts on sustainable path
The dollar reaction:
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Fed Chair Yellen will be appearing before Congress deliver her semi-annual monetary policy testimony (sometimes called the "Humphrey-Hawkins" testimony) today. Her prepared remarks are expected to sound similar to her most recent speech, noting that the labor market has tightened and wage pressures are increasing modestly.
As BofA details, she will likely note that the Fed is making progress toward its mandate of full employment and price stability with core inflation approaching the target.
However, we expect Yellen to reiterate that the Fed must proceed with a gradual hiking cycle, since rates are still close to the effective lower bound and that long-term rates are structurally lower.
In the Q&A session, we expect the focus to be on the debate over rules-based policy vs. discretion, the Fed's independence and proposed fiscal policy.
Yellen is likely to defend the Fed's independence and reiterate that fiscal stimulus is helpful, but that it depends on the design, especially given high debt levels.
"Our base case is Yellen will largely dance around the question but will nonetheless leave the door wide open to a wide range of possibilities because she can’t close any options off until the Committee has developed a plan," said Tom Porcelli, the chief US economist at RBC Capital Markets.
For now, the market is losing faith in the 'three hikes' forecast...
Before she spoke the ED curve implied the following probabilities...
And the question is whether Yellen can regain control over the Dollar having lost it apparently to Trump jawboning and China action...
Key headlines from a very hawkish Yellen speech:
- *FED SAYS ALREADY-CONCERNING CRE VALUATIONS ROSE FURTHER
- *YELLEN: FED TO ADJUST RATE PATH VIEWS AS OUTLOOK EVOLVES
- *YELLEN REPEATS WAITING TOO LONG TO TIGHTEN `WOULD BE UNWISE'
- *YELLEN: FURTHER ADJUSTMENT LIKELY NEEDED IF ECONOMY ON TRACK
As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. Incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the Committee’s expectations. At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.
Full Prepared Remarks below (link here):