- Yellen likely to remain noncommittal in today’s Congressional testimony
- Jan U.S. PPI expected to cool a bit
Yellen likely to remain noncommittal in today’s Congressional testimony — Fed Chair Yellen today will deliver her semi-annual testimony on monetary policy to the Senate Banking Committee. On Wednesday, she will then appear before the House Financial Services Subcommittee to deliver the same prepared statement but answer different questions.
Ms. Yellen today is likely to reiterate the Fed’s recent themes and does not seem likely to adopt more hawkish language that would encourage the markets to boost expectations for a rate hike at the next FOMC meeting on March 14-15. Ms. Yellen is likely to continue with her theme that she favors a slow increase in interest rates and that progress is being made in meeting the Fed’s labor market and inflation goals. The FOMC at its last meeting on Jan 31/Feb 1 left its monetary policy unchanged and made only minor changes to its post-meeting statement, which suggested that the Fed was in no hurry to signal a near-term rate hike as soon as its next meeting on March 14-15.
We look for Ms. Yellen today to remain noncommittal about the timing of the Fed’s next rate hike. The Republican fiscal agenda has been slow to emerge and in our view March will be too soon for the Fed to take any preemptive action with a rate hike. The Fed is essentially on hold at present as it waits to see exactly what Republicans will propose on fiscal policy and what legislation can actually make it through Congress.
With the Fed in a state of substantial fiscal uncertainty at present, there would be no point in Ms. Yellen ramping up a hawkish commentary since that would be gratuitously bullish for the dollar and would risk antagonizing President Trump. The Fed at this point would be well advised to simply lay low and wait to see what Washington produces on the fiscal front.
Furthermore, there is no rush for another Fed rate hike based on the Fed’s labor market and inflation goals. The recent Jan payroll report was a bit strong at +227,000, but combined with the weak Dec report of +157,000, the 2-month average of +192,000 was in line with the recent trend. Meanwhile, there was some labor market weakness indicated by the +0.1 point increase in the Jan unemployment rate to 4.8%, which is now +0.2 points above the 9-1/2 year low of 4.6% posted in November. In addition, concerns about wage inflation eased a bit after Jan average hourly earnings eased to +2.5% y/y from December’s 7-1/2 year high of +2.8% y/y.
Regarding the Fed’s inflation goal, the PCE deflator was at +1.6% in December and the core deflator was at +1.7% y/y, both below the Fed’s +2.0% inflation target. Inflation expectations have increased substantially since the election by +33 bp to 2.01%, but are down by -8 bp from the 2-1/2 year high of 2.09% posted on Jan 19.
The latest set of Fed dots released in December indicated that the median expectation among FOMC members is for three rate hikes this year. On that schedule, the Fed would need to get going with a rate hike at either its March or May meeting. In that regard, Philadelphia Fed President Patrick Harker last week warned that the March meeting is still “on the table” for a rate hike decision, although he added that he would never take a meeting off the table and that a decision would depend on how the data evolve.
In any case, the market, as usual, is not completely buying the Fed’s hawkish view. The federal funds futures market is discounting only two rate hikes in 2017, the first by May/June and the second by November/December. The market is discounting a 30% chance of a rate hike at the next FOMC meeting on March 14-15, an 82% chance of a rate hike at the May 2-3 meeting, and a 100% chance of a rate hike by June.
If asked about the Fed’s balance sheet, Ms. Yellen today will likely to just reiterate the Fed’s current position. As stated in recent post-meeting FOMC statements, the Fed’s current balance sheet position is that the Fed will maintain its existing policy of reinvesting principal payments from maturing securities in new securities until the process of interest rate normalization is “well underway.” The market is generally not expecting any change to the Fed’s reinvestment policy until 2018 or even 2019, although the Fed in coming months may start talking more about the impact of an eventual draw down in its balance sheet.
The topic of the Fed’s balance sheet has become a hotter issue now that three of the seven Fed governor chairs are open. Fed Governor Daniel Tarullo last week announced his intention to step down in early April, creating the third open seat. President Trump, if he follows through on his seemingly hawkish stance on the Fed, could appoint new Fed governors who favor a quicker start on drawing down the Fed’s balance sheet.
Jan U.S. PPI expected to cool a bit — The market is expecting today’s Jan final-demand PPI report to ease slightly to +1.5% y/y from December’s +1.6% y/y. The consensus is for the Jan core PPI to ease to +1.1% y/y from December’s +1.6% y/y. The Dec PPI headline and core figures both posted 1-3/4 year highs in December and the expected fall-back of the Jan PPI figures could help take a little air out of the post-election surge in inflation expectations. The economy in the second half of 2016 strengthened and wages have improved moderately, but the fact remains that the Republican fiscal and infrastructure program has yet to be even defined let alone passed by Congress, which means it is premature in our view to get too worried at this point about inflation.
Yellen likely to remain noncommittal in today’s Congressional testimony — Fed Chair Yellen today will deliver her semi-annual testimony on monetary policy to the Senate Banking Committee. On Wednesday, she will then appear before the House Financial Services Subcommittee to deliver the same prepared statement but answer different questions.
Ms. Yellen today is likely to reiterate the Fed’s recent themes and does not seem likely to adopt more hawkish language that would encourage the markets to boost expectations for a rate hike at the next FOMC meeting on March 14-15. Ms. Yellen is likely to continue with her theme that she favors a slow increase in interest rates and that progress is being made in meeting the Fed’s labor market and inflation goals. The FOMC at its last meeting on Jan 31/Feb 1 left its monetary policy unchanged and made only minor changes to its post-meeting statement, which suggested that the Fed was in no hurry to signal a near-term rate hike as soon as its next meeting on March 14-15.
We look for Ms. Yellen today to remain noncommittal about the timing of the Fed’s next rate hike. The Republican fiscal agenda has been slow to emerge and in our view March will be too soon for the Fed to take any preemptive action with a rate hike. The Fed is essentially on hold at present as it waits to see exactly what Republicans will propose on fiscal policy and what legislation can actually make it through Congress.
With the Fed in a state of substantial fiscal uncertainty at present, there would be no point in Ms. Yellen ramping up a hawkish commentary since that would be gratuitously bullish for the dollar and would risk antagonizing President Trump. The Fed at this point would be well advised to simply lay low and wait to see what Washington produces on the fiscal front.
Furthermore, there is no rush for another Fed rate hike based on the Fed’s labor market and inflation goals. The recent Jan payroll report was a bit strong at +227,000, but combined with the weak Dec report of +157,000, the 2-month average of +192,000 was in line with the recent trend. Meanwhile, there was some labor market weakness indicated by the +0.1 point increase in the Jan unemployment rate to 4.8%, which is now +0.2 points above the 9-1/2 year low of 4.6% posted in November. In addition, concerns about wage inflation eased a bit after Jan average hourly earnings eased to +2.5% y/y from December’s 7-1/2 year high of +2.8% y/y.
Regarding the Fed’s inflation goal, the PCE deflator was at +1.6% in December and the core deflator was at +1.7% y/y, both below the Fed’s +2.0% inflation target. Inflation expectations have increased substantially since the election by +33 bp to 2.01%, but are down by -8 bp from the 2-1/2 year high of 2.09% posted on Jan 19.
The latest set of Fed dots released in December indicated that the median expectation among FOMC members is for three rate hikes this year. On that schedule, the Fed would need to get going with a rate hike at either its March or May meeting. In that regard, Philadelphia Fed President Patrick Harker last week warned that the March meeting is still “on the table” for a rate hike decision, although he added that he would never take a meeting off the table and that a decision would depend on how the data evolve.
In any case, the market, as usual, is not completely buying the Fed’s hawkish view. The federal funds futures market is discounting only two rate hikes in 2017, the first by May/June and the second by November/December. The market is discounting a 30% chance of a rate hike at the next FOMC meeting on March 14-15, an 82% chance of a rate hike at the May 2-3 meeting, and a 100% chance of a rate hike by June.
If asked about the Fed’s balance sheet, Ms. Yellen today will likely to just reiterate the Fed’s current position. As stated in recent post-meeting FOMC statements, the Fed’s current balance sheet position is that the Fed will maintain its existing policy of reinvesting principal payments from maturing securities in new securities until the process of interest rate normalization is “well underway.” The market is generally not expecting any change to the Fed’s reinvestment policy until 2018 or even 2019, although the Fed in coming months may start talking more about the impact of an eventual draw down in its balance sheet.
The topic of the Fed’s balance sheet has become a hotter issue now that three of the seven Fed governor chairs are open. Fed Governor Daniel Tarullo last week announced his intention to step down in early April, creating the third open seat. President Trump, if he follows through on his seemingly hawkish stance on the Fed, could appoint new Fed governors who favor a quicker start on drawing down the Fed’s balance sheet.
Jan U.S. PPI expected to cool a bit — The market is expecting today’s Jan final-demand PPI report to ease slightly to +1.5% y/y from December’s +1.6% y/y. The consensus is for the Jan core PPI to ease to +1.1% y/y from December’s +1.6% y/y. The Dec PPI headline and core figures both posted 1-3/4 year highs in December and the expected fall-back of the Jan PPI figures could help take a little air out of the post-election surge in inflation expectations. The economy in the second half of 2016 strengthened and wages have improved moderately, but the fact remains that the Republican fiscal and infrastructure program has yet to be even defined let alone passed by Congress, which means it is premature in our view to get too worried at this point about inflation.