Fed: A Prologue to Humphrey Hawkins

Published on July 10, 2015

Federal Reserve Chair Janet Yellen hued closely to the Federal Open Market Committee’s June meeting base case for underlying economic fundamentals that should “lead to some pick up in the pace of economic growth in the coming years.”

** But as we also expected (SGH 7/10/15, “Fed: Yellen Today”), Chair Yellen’s accent was firmly on the base case growth outlook with only a mention here and there of the downside risks like Greece. She asserted there were “tentative signs of a pick-up in wages” that for the first time we can recall she said “may indicate the objective of full employment is coming closer into view.” Even if she made a point about the slack that remains, the forecast for full employment by year-end would neatly point back to the start to policy normalization this year, which we still expect is more likely than not in September.

** Greece did get its two cents of mention, but there was less of an emphasis on it or the other global risks to the US outlook than even we might have expected. This was her first real opportunity to comment on either the Greek or China risks to the US outlook which could have fed into the market anxieties over their impact on the Fed policy path. She in fact made a point of saying the risks to the base case cut both ways, that they could “delay or accelerate this first step” of policy normalization.

** That said, however, it is nevertheless worth noting that when Chair Yellen cited the Fed’s expectations the dollar and oil will stabilize next year, it was also an indirect way of acknowledging the risks that remain to the base case policy path: if low global growth or a crisis in Europe or China do spill over into the currency markets and lower growth or into a renewed dis-inflation, it would erode the FOMC’s confidence in the forecast for inflation to begin edging higher towards 2%. It is a risk, not a reality, but is probably the reason she and her colleagues tend to couch their optimism in cautious terms.

** And as something of a prologue to the twin Humphrey Hawkins testimonies next Wednesday and Thursday, the bit that we liked the most was Chair Yellen’s observation that the fiscal policy drag on growth since 2011 looks to be more neutral these days and hopefully in the years ahead. The members of the House Financial Services and the Senate Banking Committees will no doubt have taken note.

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