As suspected after Lael Brainard’s speech yesterday, Janet Yellen is not pre committing to another rate hike sooner rather than later because of the recent inflation stats but instead is now focused on ‘Balance Sheet Normalization.’ As I’ve said, QT wording is never used by them. “The Committee currently expects that, provided the economy evolves broadly as anticipated, it will likely begin to implement the program this year” and which would bring “the quantity of reserve balances to a level that is appreciably below recent levels but larger than before the financial crisis.”
With respect to the raising further of the fed funds rate, the process will however continue, albeit gradually which we’ve heard a million times. Yellen again is talking about the low ‘neutral rate’ in their estimation (I want to emphasize that the neutral rate is a made up figure spit out by their econometric models as there is no such actual thing as a neutral rate) which gives them license for this gradual process. They do think the neutral rate will rise from here which would then warrant more hikes. They will be watching specifically as to how “inflation will respond to tightening resource utilization”, aka whether the Phillips Curve still applies.
Bottom line, the speech was uneventful in that nothing really new was said relative to the clues we’ve been receiving from other Fed speeches. As stated, the comments were similar to Brainard’s and the only question now is when QT begins which the prepared testimony didn’t allude to specifically. I do expect more color on this in the Q&A. I guess we can call her comments somewhat dovish on the next move in rate hikes and continued modest hawkish on the likelihood for QT. Because of the former, the 2 yr yield is lower by 3.5 bps to 1.34%, a 2 ½ week low while the 10 yr is falling by 5 bps to 2.31%, also being helped by the rally in European sovereign bonds.
Also, the dollar is weak and gold is bouncing while stocks still don’t seem to care about QT, for now.