Fed: Yellen on the Hill

Published on February 23, 2015

A few points about Federal Reserve Chair Janet Yellen’s appearance before the Senate Banking Committee tomorrow morning and the House Financial Services Committee on Wednesday:

** First, expectations that Chair Yellen will offer clues to the Fed’s messaging intentions at its upcoming March meeting are likely to be disappointed. Testimony on Capitol Hill, as we noted previously (SGH 2/18/15, “Fed: The Minutes, the Testimony, and into March”), is about the last place any Fed Chair would want to offer nuance or insights into the trade-offs needed within the Federal Open Market Committee before there is a clear consensus on something so sensitive as forward guidance. We doubt it will be brought up in her opening remarks and we suspect most Committee members will not think to use up their valuable question time on something so specific.

** Chair Yellen can otherwise be expected to stick close to the main takeaways of the Federal Open Market Committee January meeting statement and Minutes in her opening statement. She will put an accent on the underlying momentum of a “solid” recovery, likely continued falls in the headline unemployment rate, and that the start to policy normalization is indeed nearing. There may be some additional color in the Senate and House Q&A sessions, but she will be careful not to drift from a broad message on the outlook. Again, going up to the Hill is not about toying with new policy signals but how to get through the two days without getting too beat up in presenting her case against the inevitable political attacks on the Fed.

** We should also add we suspect the Fed is unlikely to share the market’s current questions over the “hawkishness” of the most recent Nonfarm Payroll versus the “dovish” FOMC January meeting Minutes. For the Fed, the NFP numbers were great but nothing outside the base case of the central tendency path, while the Minutes were hardly tweaked to be some sort of dovish messaging, since that is not how the Minutes are prepared and in any case, the meeting entailed a lot of discussion over the approaching rates lift-off, such as the staff briefings on the repo mechanics or the multiple timing and pace scenarios. The price action in response to the Yellen testimony will be a reflection more of the market mood swings than a shift in signals on the Fed’s likely policy path.

** Chair Yellen can also be expected to acknowledge the oil-fueled drop in inflation still to come, but to again assert it will be transitory, assuming oil prices are stabilizing. But it is uncertain how far she will go in conveying the anxieties felt by more than a few Committee members over a persistence in the low inflation or how much the FOMC wants to see firmer signs of even the smallest upward movement in inflation before hiking that could send an excessively dovish message. And although higher wages — thank you Walmart — are still the most likely underpinning to an eventual uptick in inflation, tethering a rate hike to better pay is not exactly a winner of a message on Capitol Hill.

** We also suspect, if it comes up, Chair Yellen will do her best to point to how the pace of the tightening will prove to be as or more important than the timing to that first rate hike. That the Minutes indicated the staff presented the Committee with multiple timing and pace scenarios at the January meeting but with no other detail would suggest how far they are from a consensus and how the issue is due a revisit in March. Chair Yellen though would probably be on safe ground if she again affirmed in broad terms how the tightening cycle is more likely than not to be very gradual even if it is not on a pre-set measured path and will depend on a meeting to meeting assessment of the data.

** Looking beyond what Chair Yellen may or may not say in her two days of testimonies about the near term policy path, we would just add that while we did think there would be more description of the Committee debate over “patience” in the January meeting Minutes, we wonder just how hard it will be by the time of the March meeting five weeks from now to make it clear the anticipated rates lift-off is nearing and is most likely to come between the June and September meetings? It certainly won’t be a shocker if Committee members, wherever they are on the most likely rate hike timing, pound away between now and the March meeting on the need for greater flexibility than the problematic two-meeting explicit meaning of the patience language in the forward guidance currently gives them.

** We still think the March meeting will be too early for the FOMC to make a hard call on the rates lift-off timing one way or another — certainly on the inflation front — but the meeting will be all about fixes to the guidance to maximize that prized optionality on the timing to a first rate hike that could still come as early as the June meeting — with those four months of data preceding it, it could still happen — and right through to the higher probability of a September first rate hike (SGH 2/18/15, “Fed: Looking to September; Caution on Guidance Changes”).

** Chair Yellen is tomorrow also likely to face populist-tinged political attacks on the Fed, as we have already forewarned in prior reports (see SGH 2/5/15, “Fed: A Rising “Audit” Risk” and SGH 2/18/15, “Fed: The Minutes, the Testimony, and into March”). Senator Rand Paul’s “Audit the Fed” bill will get no small amount of political airplay and is equally likely to become a legislative vehicle of sorts for every oddball political effort to limit the Fed’s operational independence. But we also think the fervor behind this newfound “monetary McCarthyism” is more likely than not to fade through the year, in large part, because it will be co-opted by Senate Banking Chairman Richard Shelby into a leverage over the Fed and the White House on his own, still undefined agenda, but probably entailing a tougher regulatory oversight of the big banks and exemptions for the community banks.

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