Yesterday the Chair of the Federal Reserve, Janet Yellen, gave the first part of her regular biannual testimony to Congress before the upper house of the bicameral legislature, the U.S. Senate. The major takeaway from the testimony is widely accepted to be a more hawkish stance, paving the way for a rate hike of 0.25% in the Federal Funds Rate at the FOMC meeting next month in March. This is the most important headline, but her testimony obviously included some more detailed and nuanced messages which I’m going to delve into today.
- She recognizes that the inflation rate is moving towards the Federal Reserve’s stated target rate, and is prepared to hike rates any month that inflation data looks too strong – a generally hawkish policy tone dominates.
- She hinted that the Federal Reserve may have been a little slow to raise rates recently, and stated that they won’t be shy to raise rates again as any delay will just require even stronger hikes later, which would be dangerous. As such, the market’s consensus is that there will be at least two further rate hikes of 0.25% over 2017. One is expected in June, the other in December. The market sees a 34% chance of three rate hikes of 0.25% each happening this year, up slightly from a 30% chance before Yellen’s testimony.
- Yellen is generally thought not to mesh politically with President Trump, so investors sat up and took notice when she said that she agreed with the core principles of the President’s recent executive order on financial regulation. It was this remark that was probably most responsible for the U.S. market pushing on and making new all-time high prices yesterday.
- She pointed to the “importance” of “improving the pace of longer-run economic growth” and of “improving productivity”. This also seemed to chime with the President’s economic priority of boosting economic growth.
The net effect was a slightly stronger U.S. Dollar and a stronger stock market: a slightly muted version of the “Trump Trade” is back on. 