6 Things We Learned from Janet Yellen’s Testimony

ICYMI, Fed Governor Janet Yellen made waves in the markets yesterday after she delivered her testimony and answered questions before the Joint Economic Committee in Washington.

What the heck did she say anyway? Here are the highlights:

Rate hike is coming

Why wait for winter when a rate hike is more likely? In the Fed’s official release, Yellen remarked that a rate hike “could well become appropriate ‘relatively soon’ if incoming data provide some further evidence of continued progress toward the Committee’s objectives.

Recall that the Fed members kept their hands off the rate hike trigger earlier this month even though they believe that progress in the labor market has continued, the economic activity has picked up, and inflation has increased somewhat since earlier this year.

Yellen defended the move, saying that “Waiting for further evidence does not reflect a lack of confidence in the economy.” Instead, she and her team only recognized that the economy “has had a bit more ‘room to run’ than anticipated earlier.

Despite that, the Fed head honcho warned that postponing interest rate increases for too long would necessitate abrupt rate hikes down the road. This could lead to the economy overshooting the Fed’s long-term goals and foster financial instability through “excessive” risk-taking.

It’s all good in the hood

Yellen generally sounded positive on the economy, saying that it has made “further progress” in terms of fulfilling the Fed’s goals to maximize employment and stabilize prices. Here are some quick notes:

On economic growth

  • Growth has picked up from 1% in H1 to nearly 3% in Q3 2016, thanks in part to inventory building and a surge in soybean exports.
  • Consumer spending is supported by higher consumer confidence and disposable income, and low borrowing rates.
  • Manufacturing continues to be restrained by weak global growth and a strong dollar.
  • Underlying fundamentals point to a pickup in new housing construction.

On the labor market

  • Job gains are slower than last year but still well above estimates of the pace necessary to absorb new entrants to the labor force.
  • The stability of the unemployment rate, combined with above-trend job growth, suggests that the U.S. economy has had a bit more “room to run” than anticipated earlier.
  • Unemployment rate is still above the Fed’s long-term estimates.
  • Involuntary part-time employment remains elevated relative to historical norms.

On inflation

  • Inflation (measured by PCE) is higher than earlier this year but still below the Fed’s 2% target.
  • Much of the shortfall is due to lower energy prices and in prices of non-energy imports.
  • Core inflation is at around 1.75%.

Overall, the Fed expects the economy to grow at a “moderate pace,” enough to further strengthen the labor market and eventually meet the Fed’s 2.0% inflation target.

Homegirl is here to stay

With Trump slated to become the new Prez by January, market bees buzzed about the possibility of Yellen stepping down as the Fed’s top boss. See, Trump previously said that Yellen should be “ashamed” of her actions, as the Fed’s policies were political positions designed to help Obama.

Yellen said “No can do, sister!” She reminded that she was confirmed by the Senate to serve as Chairman until January 2018 and that it is “fully my intention to serve out that term.” Okay, she what she really said was “No, I cannot,” but you get what I mean.

Wait and see mode on Trumponomics

Yellen recognized the recent “significant market moves” that reflected market expectations of more fiscal stimulus, saying that it could have “inflationary consequences” that would force the Fed to react.

Specifically, she pointed out that unlike in 2008/9 when a large fiscal injection was appreciated, today’s economy is “operating relatively close to full employment.” She added that current forecasts debt-to-GDP ratio is already at 77% and is expected to jump to 86% by 2026 and a whopping 141% by 2046.

Until then, Yellen and her gang will be on a wait-and-see mode. She said that “when there is greater clarity about the economic policies…the Fed will factor…impact on employment and inflation and perhaps adjust our outlook.

Central bank independence? Yes pls!

With the GOP in control of the White House and both chambers of Congress, the Fed may face calls for closer oversight and pressure to use other formulas for setting its rates.

Seems like Yellen is against the idea. She’s said “We’ve really seen terrible economic outcomes in countries where central banks have been subject to political pressure,” adding that “there is clear evidence of better outcomes in countries where central banks can take the long view.” Oh, and she also believes that “sometimes central banks need to do things that are not immediately popular for the health of the economy.

All aboard the dollar train!

Not surprisingly, Yellen all but announcing a rate hike in December led to another bullish leg for the dollar.

15-minute charts (source: Investing.com)

15-minute charts (source: Investing.com)

The benchmark 10-year Treasury bond yield settled at 2.278% yesterday, its highest since December, while the dollar index broke above its 100.50 resistance zone and hit 14-year highs. Wowza!

Now that an interest rate hike is all but announced by the Fed, do you think there’s still room for the dollar to strengthen until the actual announcement in December?


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