How Yellen’s Speech Downplayed June Rate Hike Expectations

Fed head Janet Yellen sure knows how to play with forex traders’ feelings, doesn’t she? After sounding upbeat during the latest FOMC policy statement, Yellen was back to her usual cautious self in her testimony in front of the Senate Banking Committee this week.

yellen usdIn fact, she emphasized that the Fed is unlikely to hike interest rates in the next two policy meetings since economic conditions might not be strong enough to warrant tightening then. She went on to say that, should the economy show significant improvements later on, the FOMC would first change its forward guidance before making any actual policy adjustments.

To be specific, forex market participants should watch out for the Fed’s removal of the word “patient” in discussing their approach to rate hikes, which would mean that policymakers have more flexibility to tighten if data warrants it. However, Yellen clarified they would proceed on a meeting-by-meeting basis, which basically means that they will be taking very careful baby steps before actually increasing interest rates.

“It continues to be the FOMC’s assessment that even after employment and inflation are near levels consistent with our dual mandate, economic conditions may, for some time, warrant keeping the federal funds rate below levels the committee views as normal in the longer run,” Yellen explained.

Although this doesn’t change the fact that the Fed is probably the only major central bank moving closer to tightening monetary policy at this point, market watchers couldn’t help but feel disappointed that an actual rate hike might take much longer than initially expected. Several analysts pushed their rate hike expectations later from June to September or October this year, as Yellen mentioned that they’d like to see sustained improvements in employment and a rebound in inflation.

While the Greenback got tossed around as traders tried to make sense of Yellen’s remarks during the actual event, dollar bulls sulked at the end of the day when her testimony revealed that a Fed rate hike isn’t set in stone just yet. After all, a lot could happen over the next few months and there’s still a chance that inflation could fall further and hiring could weaken. Do you think the dollar’s selloff was just a correction or is it the start of a reversal?