Live Feed

* * *

Update:  Why did the dollar and Treasuries react as if stung moments after Yellen's prepared remarks were released?

Because according to a cursory scan of her speech, she was more hawkish than most expected, arguably making a March rate hike "live" after warning that "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."

Further hawkishness emerged from her claim that "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."

Yet to offset that hawkshness, Yellen cautioned that the US economy and fiscal policy face an uncertain path under the administration of Donald Trump, as she played down any expectations of a March rate rise and declared “monetary policy is not on a preset course”. In prepared remarks for her Valentine’s Day testimony Ms Yellen also struck a note of caution about the new administration and expectations that its plans for tax cuts, infrastructure spending would lead to looser fiscal policy and more rapid growth.

Indeed, looking at the Fed Funds market, March, the increase so far has been some what tepid, with odds increasing from 30% before, to 36% after Yellen's prepared remarks.

“Considerable uncertainty attends the economic outlook,” she said, pointing to “possible changes in US fiscal and other policies” as one of the main sources of that uncertainty alongside questions about productivity growth and international developments.

She added that any future moves, Ms Yellen said, would depend on continuing progress in both US employment and inflation, which at 1.6 per cent remains below the Fed’s 2 per cent target rate.

“The economic outlook is uncertain, and monetary policy is not on a preset course,” she told members of the Senate Banking Committee, adding that “changes in fiscal policy or other economic policies could potentially affect the economic outlook,” she said, adding that “it is too early to know what policy changes will be put in place or how their economic effects will unfold”.

* * *

Here are the speech highlights, courtesy of BBG

• Yellen says incoming data indicates labor market conditions continue to strengthen and inflation is moving to 2%.
• “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,” she says in prepared testimony for a Senate Banking Committee hearing
• “Waiting too long to remove accommodation would be unwise,” Yellen reiterates
• Discussing the balance sheet, she says committee has continued policy of reinvesting
• “This policy, by keeping the Committee’s holdings of longer-term securities at sizeable levels, has helped maintain accommodative financial conditions”
• Says monetary conditions are accommodative, which supports “some further strengthening” of labor market conditions and a return to 2% inflation
• Says FOMC expects economy to continue expanding at “moderate pace” as job market strengthens “somewhat further” and inflation gradually increases to 2%
• “The economic outlook is uncertain, and monetary policy is not on a preset course,” she says, adding uncertainties include possible changes in fiscal and other policies, the path of productivity growth and intl developments
• It’s too early to know what policy changes will occur or how their effects will unfold, she says
• Yellen highlights importance of improving the pace of longer-run economic growth and raising living standards with policies designed to improve productivity
• Says she hopes fiscal changes will be consistent with putting fiscal accounts on sustainable path

The dollar reaction:

And yields:

* * *

Earlier:

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

Key Excerpt:

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.  
 

Full Prepared Remarks below (link here):