Yellen Assured Rates To Stay Low For Some Time While Hinted Early Tightening Should Employment …

In the semi-annual testimony before the Senate Banking Committee, Fed Chairman Janet Yellen reiterated that ‘a high degree of monetary policy accommodation remains appropriate’. While acknowledging the ‘notable improvements’ in the job market, Yellen warned that ‘significant slack remains’. Meanwhile, the chairman noted that the economy ‘continues to improve’ but warned that ‘the recovery is not yet complete’. It appears that Yellen attempted to downplay speculations of an earlier than expected rate hike upon recent improvement in the US economic data. Market reaction was volatile, in particular when Yellen commented that rate hike would come sooner if the ‘the labor market continues to improve more quickly than anticipated’.

On the economy, Yellen acknowledged improvement in US economy, noting that growth in 2Q14 should rebound but ‘bears close watching’. Despite the improvement, ‘the recovery is not yet complete’. On the job market, Yellen pointed out that that labor force participation ‘appears weaker than one would expect based on the aging of the population and the level of unemployment’ while the lukewarm growth of labor compensation suggested that substantial labor market slack remains. These comments were largely the same as what was delivered in the June FOMC meeting. What was different from June was that Yellen did not described recent increase in inflation as ‘noise’. Rather, she indicated that policymakers expected ‘inflation to move back toward our 2% objective over coming years’. Meanwhile, the chairman noted that the housing market ‘has shown little recent progress’.

On the monetary policy, Yellen reiterated that the Fed would continue with its accommodative monetary policy and reaffirmed that the tapering process would complete in October while interest rates would likely stay low for a ‘considerable period’ after the end of asset purchase program. However, the chairman also indicated that ‘if the labor market continues to improve more quickly than anticipated by the Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner than currently envisioned. Conversely, if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated’.

Compared with the June meeting when Yellen noted that ‘if the economy proves to be stronger than anticipated by the Committee…’, the language used in the testimony appeared to show that the strong employment data in June might have effects in the Fed’s tightening consideration. Yet, investors have to be cautious that the Fed is using broad measures, rather than merely the unemployment rate, in rate decision.

FOMC’s Dot Plot in June

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