Fra Goldman
Fed Chair Yellen’s Prepared Remarks Suggest Additional Hikes Remain FOMC Baseline
BOTTOM LINE: Chair Yellen’s prepared remarks to the House Financial Services Committee contained little new information on the monetary policy outlook, and were roughly in line with comments made by Vice Chair Fischer and New York Fed President Dudley over the past couple weeks. She continued to highlight the FOMC’s expectation for “gradual” increases in the federal funds rate.
MAIN POINTS:
1. Regarding recent turmoil in financial markets, Chair Yellen acknowledged that “Financial conditions in the United States have recently become less supportive of growth”, and that “if they prove persistent, could weigh on the outlook for economic activity and the labor market”. However, she also mentioned that “Declines in longer-term interest rates and oil prices provide some offset”.
2. There was little new information regarding the monetary policy and economic outlooks. In terms of monetary policy, she continued to note that “The FOMC anticipates that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.” Although Chair Yellen recognized that economic activity in the fourth quarter of last year “is reported to have slowed more sharply”, she also continued emphasizing that “labor market conditions have improved substantially” although “there is still room for further sustainable improvement”.
3. Chair Yellen recognized the potential for negative spillovers from international developments, noting that “Foreign economic developments, in particular, pose risks to U.S. economic growth.” She also attributed recent market volatility to foreign developments, highlighting that “declines in the foreign exchange value of the renminbi have intensified uncertainty about China’s exchange rate policy and the prospects for its economy. This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth”.
4. Chair Yellen acknowledged the recent declines in measures of inflation expectations, but we did not detect a broader shift in Fed officials’ assessment of these developments. Regarding survey based measures, she noted that they are “at the low end of their recent ranges; overall, however, they have been reasonably stable”. In terms of the recent declines in breakevens, Yellen noted that “market-based measures of inflation compensation have moved down to historically low levels.” However, she continued to emphasize her belief that most of these declines reflect “changes in risk and liquidity premiums over the past year and a half”
