Janet Yellen is NOT committing herself to a March rate hike but she’s doing what I thought she should do and that is put March on the table (try to get rate hike odds nearer to 50%) vs a market that essentially took it off (with odds at 30%). She talked about the continued progress made on the employment front and the inflation stats moving to their target goals.
On the possible monetary policy response, she repeated “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.” That’s what puts March on the table.
“Incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the Committee’s expectations.” Keep in mind, when the Fed reaches their goals, the fed funds rate should be at their long term target of 3% vs .625% now. Rate hike cycles should not begin in earnest when you have reached the Congressional mandates. I highlight this to repeat how far behind they are in adjusting policy. They counter this by continuing to rely on their econometrically measured ‘neutral rate’ which the Fed estimates to be “well below pre crisis levels, a phenomenon that may reflect slow productivity growth, subdued economic growth abroad, strong demand for safe longer term assets and other factors.” She though expects this ‘neutral rate’ to rise over time as those factors diminish in their impact.
It wasn’t until the 2nd to last paragraph of her testimony that she touched upon upcoming fiscal policy by saying “changes in fiscal policy or other economic policies could potentially affect the economic outlook. Of course, it is too early to know what policy changes will be put in place or how their economic effects will unfold.” I appreciated that she didn’t use the word ‘uncertainty’ but this commentary basically implies that.
She finished by saying they will continue to reinvest maturing securities but I would hope she’s asked about when the balance sheet will start shrinking. That will be a major market event when it starts to happen but likely not to the end of this year or into 2018.
Yields are jumping as March is on the table. The 2 yr note yield is up 4 bps on the day to the highest since December 28th and the 10 yr yield is up by 4 bps as well to 2.48% and puts it a touch above the multi month range of 2.30-2.60%. Rate hike odds as of this writing is up to 36% for March vs 30% just prior and up from 24% last week.