Yellen Warns Of Excessive Risk-Taking In Testimony, Says Hike "Appropriate Soon", No Mention Of Election

Before we get into Janet Yellen's prepared remarks to be delivered at 10am before the Join Economic Committee, which is seen by the market as an opportunity by the Fed chair to signal whether the central bank is likely to raise interest rates at its Dec. 13-14 meeting, here is a framework of 5 key items to look for courtesy of the WSJ.

1.  December Signal

All ears will be listening for Ms. Yellen to affirm recent statements from her colleagues that the Fed remains on track for a December rate increase. Officials signaled after their last meeting that they were getting closer to lifting rates, and needed only a little more evidence that the economy was improving to convince them to move next month. She could point to a handful of indicators the Fed has received since its Nov. 1-2 meeting: employers continued to add jobs at a steady clip in October, annual wage gains accelerated at the fastest pace since June 2009 and consumer spending at retail stores advanced at a healthy pace this fall.

2. Election Fallout

Several Fed officials raised concerns before their November meeting about the possibility for market volatility following the presidential election. Many investors were stunned by Donald Trump’s victory, but stocks have rallied on hopes that the new administration’s policies will boost economic growth along with inflation and interest rates. Still, lawmakers will likely want Ms. Yellen’s view of the market’s reaction – including a rise in government bond yields.

3. Trump Effect

Ms. Yellen will likely be asked to weigh in on the potential economic effects of Mr. Trump’s proposed fiscal policies, including plans to boost infrastructure spending and slash taxes. While the Fed is often reluctant to comment on legislation, there is precedent for Fed chairmen signaling their approval for fiscal stimulus. Central-bank officials have made clear in recent years that they need Congress’s help to further boost economic growth. But some officials have warned that a surge in spending could force Fed officials to raise interest rates faster than they currently expect.

4. Fed Independence

The Fed could face significant political pressure next year under a Trump administration. Republican efforts to alter the Fed’s operations and subject it to greater congressional scrutiny have gained broader support in recent years, and Mr. Trump has made no secret of his disapproval of the Fed. Expect Ms. Yellen to make the case against those efforts, which she has said would erode the Fed’s independence and subject it to political interference that could ultimately harm the economy.

5. Inflation Firming

Republicans on Capitol Hill have complained for years that the Fed’s easy money policies could push inflation up to dangerous levels, but price increases have remained subdued. Recent signs of firming inflation could give GOP lawmakers a new opening to press Ms. Yellen on the Fed’s low-rate policies. Fed officials said in their November policy statement that inflation has “increased somewhat since earlier this year.” They also noted that some investors’ expectations of future inflation “have moved up but remain low.” Ms. Yellen could offer new insight Thursday into how officials view the risk of a sharp upturn in inflation.

With that out of the way, here are the highlights from Yellen's speech courtesy of Bloomberg and MarketNews:

  • YELLEN SAYS RATE HIKE COULD BE APPROPRIATE `RELATIVELY SOON'
  • YELLEN SAYS KEEPING RATES ON HOLD COULD SPUR EXCESS RISK-TAKING
  • YELLEN: CURRENT MON POL STANCE IS 'MODERATELY ACCOMMODATIVE'
  • YELLEN: DELAYING HIKES TOO LONG COULD MEAN TIGHTENING FASTER
  • YELLEN: SEES SCOPE FOR SOME FURTHER IMPROVEMENT IN LABOR MKT
  • YELLEN: RISK OF FALLING BEHIND CURVE 'APPEARS LIMITED'
  • YELLEN: CURRENT MON POL STANCE IS 'MODERATELY ACCOMMODATIVE'
  • YELLEN: APPEARS TO BE SCOPE FOR SOME MORE LABOR-MARKET GAIN
  • YELLEN: FOMC MUST REMAIN FORWARD LOOKING IN SETTING POLICY
  • YELLEN: EXPECTS ECONOMIC GROWTH TO CONTINUE AT 'MODERATE PACE'

Perhaps just as notably, there was no mention of the presidential election, despite watchers looking for further insight into what the Fed thinks of Trump.

More details from Reuters:

The Federal Reserve could raise U.S. interest rates "relatively soon" if economic data keeps pointing to an improving labor market and rising inflation, Fed Chair Janet Yellen said on Thursday in a clear hint the U.S. central bank could hike next month.

 

Yellen said Fed policymakers at their meeting earlier in November judged that the case for a rate hike had strengthened.

 

"Such an increase could well become appropriate relatively soon," Yellen said in prepared remarks that were her first public comments since the United States elected Republican Donald Trump to be the country's next president.

 

Yellen, who was to deliver the remarks to lawmakers at 10 a.m. on Thursday, said the economy appeared on track to grow moderately, which would help bring about full employment and push inflation up and toward the Fed's 2 percent target.

 

She said current interest rate policy is stimulating economic output but the economy still has "a bit more room to run."

 

She said at this point she feels there is only a small risk the Fed is behind the curve on inflation, warranting only a gradual increase in the federal funds rate

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Her full testimony to be delivered today at 10am is below (link).