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.
Fed Chair Janet Yellen is due to speak at 10ET…
Full Prepared Remarks below: