Having yesterday explained how The Fed is "devoted" to Americans' interests [8] and how "excited" she is to raise rates, Janet Yellen is set to face the Joint Economic Committee of Congress today... to explain to them how - in her mind - everything is awesome enough to hike rates, despite Chinese stocks crashing again [9], carnage in commodities [10], a revenues recession [11], plunging EBITDA [12], a collapse in US manufacturing [13], housing rolling over [14], and auto sales fading (light vehicle incentives up 14% YoY [15]). Following the renewed volatility in markets, thanks to Draghi, the question is will Yellen be a little more hawkish given the room the ECB has given her?
Yesterday's punchline:
Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession
Ironically, it is rate hikes that have been the cause of every single recession since the arrival of the Fed.
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As Citi's Stephen Englander notes,
Fed Chair Yellen’s problem is not the hawks or center of FOMC, who feel a hike is overdue. Her problem is the doves who still feel that there is significant slack and that the amount of effective stimulus is much less than zero rates and a big balance sheet would suggest. So if she wants to have a consensus with one or fewer dissents she has to convince the doves that she is committed to a slow pace of hikes. Along these lines, both Evans and Brainard yesterday seemed more or less reconciled to December lift-off and their emphasis was on the pace of hikes subsequently, and they are pretty committed doves.
The easiest way for her to sound dovish is to keep talking about 1) the dollar and implied tightening of monetary conditions – Fed focus on the currency is rare enough still that it will be effective, 2) the need to be prudent in assessing the impact of lift-off on the economy and asset markets, 3) the sorry state of the rest of the world, and 4) her view that the equilibrium interest rate remains low and will rise only gradually. Essentially, she will point to lift-off and be almost apologetic about it. Just talking about the USD repeatedly will convince the market that the FOMC will take it into account in determining the pace of hikes. (My personal view is that USD has modest impact, but that is not here or there with respect to the stance that Fed Chair Yellen will take.)
What would be a hawkish surprise? Talk about how robust US economy has been, make some comments on inflation firming in parts of the data, talk about the fast pace of the unemployment drop and say something like market is already pretty dovish in its expectations. It’s possible but I can’t see what would motivate her to make this emphasis.
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Don't forget, it's all for you...
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