Three Messages from Janet Yellen’s Testimony

Three Messages from Janet Yellen’s Testimony
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Three Messages from Janet Yellen’s Testimony

Federal Reserve Chair Janet Yellen took to Capitol Hill this week to deliver the Fed’s semiannual Monetary Policy Report to Congress, a forum that for many years infused volatility into the financial markets. Yesterday’s report was more of a nonevent than those of yesteryear, owing to improvements in recent years in the transparency of the Fed’s public communications, as well as the current state of play at the Fed, which is aiming to dull the impact of its first rate hike since 2006, if and when it finally delivers the hike.

Although markets were largely unfazed by Yellen’s testimony, calm has become the norm – the days when markets move significantly on something the Fed says or does are gone for the most part. The Fed now better understands the influence its words can have and aims to make the impact of policy change more a process than an event for the markets.

In the absence of major “breaking” Fed news, tracking the evolution of the Fed’s thinking has become more important for assessing both the Fed’s next moves and any possible investment implications.

Here are three notable messages from Janet Yellen’s congressional testimony:

  1. Yellen did her utmost to retain optionality to raise interest rates at any upcoming Fed meeting, but she provided no hint at timing, consistent with recent Fed efforts to provide minimal verbal forward guidance and keep markets focused more on data than words.
  2. A rate hike this year remains highly probable in the Fed’s mind (we agree), because the Fed foresees a pickup in economic growth, supported by personal consumption and housing, as well as a reduction in the negative influences that recently hurt capital spending.
  3. Yellen made clear that, while developments abroad are important, the Fed is more watchful than worried.

In the end, markets are back to square one: following data for clues as to when the Fed might raise interest rates. This almost certainly is just how the Fed chair wants it.

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