woensdag 12 juli 2017

Yellen's Dovish Turn: Concerned About Inflation, Sees Little Room For Rate Increases

Fed Chair Janet Yellen's prepared remarks confirm her previous stance that they will keep normalizing their policy stance (no matter what), bringing forward the timeline for unwinding the balance sheet, and adding that "rates won't have to rise much further to get to neutral." This seems like a 'dovish' tilt, and judging by the reaction in stocks (higher) and the dollar (lower) it agrees. Here is the key line the market is focusing on: Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance. Is this a warning that the Fed's dot plot is about to revised well lower than its terminal 3.0% rate, if indeed the Fed is starting to get worried about r*? Perhaps, although she gave herself a loophole: because we also anticipate that the factors that are currently holding down the neutral rate will diminish somewhat over time, additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion and return inflation to our 2 percent goal. Even so, the Committee continues to anticipate that the longer-run neutral level of the federal funds rate is likely to remain below levels that prevailed in previous decades.
# Still, uncertainty was the key word, summed up by this line: “I see roughly equal odds that the U.S. economy’s performance will be somewhat stronger or somewhat less strong than we currently project.”
*) A recap of the key considerations via BBG:
- On inflation, “it appears that the recent lower readings on inflation are partly the result of a few unusual reductions in certain categories of prices,” she says in prepared remarks to the House Financial Services Committee. She and the FOMC expect “the economy will continue to expand at a moderate pace over the next couple of years, with the job market strengthening somewhat further and inflation rising to 2 percent”
- On domestic and foreign economic growth “should increase resource utilization somewhat further, thereby fostering a stronger pace of wage and price increases”
- On uncertainty in the outlook: “There is, for example, uncertainty about when, and how much, inflation will respond to tightening resource utilization. I see roughly equal odds that the U.S. economy’s performance will be somewhat stronger or somewhat less strong than we currently project”
- On monetary policy: “Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance. But because we also anticipate that the factors that are currently holding down the neutral rate will diminish somewhat over time, additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion and return inflation to our 2 percent goal”
- On the balance-sheet runoff plan: “The Committee currently expects that, provided the economy evolves broadly as anticipated, it will likely begin to implement the program this year”
# Indicatively, this is what a Fed balance sheet rolloff could look like if the Fed halted reinvestments in September as the consensus believes...


# Key headlines:
*YELLEN SAYS INFLATION RESPONSE TO ECONOMY IS KEY UNCERTAINTY
*YELLEN SAYS FED MONITORING INFLATION DEVELOPMENTS CLOSELY
*YELLEN: JOB GAINS, GROWTH SHOULD FOSTER WAGE AND PRICE GAINS
*YELLEN: RATES WON'T HAVE TO RISE MUCH FURTHER TO GET TO NEUTRAL
*YELLEN: ODDS AROUND U.S. ECONOMIC OUTLOOK ARE ROUGHLY EQUAL
*YELLEN SAYS INFLATION RUNNING BELOW GOAL, HAS DECLINED RECENTLY
*YELLEN: U.S. FISCAL POLICY ANOTHER SOURCE OF UNCERTAINTY
*YELLEN: INVESTMENT HAS TURNED UP, GROWTH ABROAD STRENGTHENING
*YELLEN SEES MODERATE GROWTH PACE CONTINUING NEXT FEW YEARS
*YELLEN: LONG-RUN NORMAL SIZE OF B/SHEET STILL TO BE DETERMINED
*YELLEN: FOMC EXPECTS TO BEGIN SHRINKING BALANCE SHEET THIS YR
*YELLEN: FED DOESN'T EXPECT TO USE B/SHEET AS ACTIVE POLICY TOOL
*YELLEN: ADDITIONAL GRADUAL RATE HIKES NEEDED IN NEXT FEW YEARS....