Fed: Yellen Today

Published on July 10, 2015
SGH Insight
"Federal Reserve Chair Janet Yellen will be speaking on the US economy starting at 12:30 today in an address before the City Club of Cleveland. We suspect that, on balance, her remarks on the domestic economy may surprise to the upside, taken by a dovish-leaning market keenly focused on global risks as mildly more hawkish than what might be expected."
Market Validation
(WSJ 7/10/15) "Shorter-dated U.S. government bonds extended their price losses Friday after Federal Reserve Chairwoman Janet Yellen signaled the central bank is on track to raise short-term interest rates later this year.
The yield on the two-year Treasury note climbed to 0.649%, compared with 0.621% before Ms. Yellen spoke and 0.585% on Thursday, according to Tradeweb. Yields rise as prices fall.
The yield on the benchmark 10-year Treasury note was 2.403% compared with 2.377% right before the Fed chairwoman’s speech and 2.301% Thursday."

Federal Reserve Chair Janet Yellen will be speaking on the US economy starting at 12:30 today in an address before the City Club of Cleveland. We suspect that, on balance, her remarks on the domestic economy may surprise to the upside, taken by a dovish-leaning market keenly focused on global risks as mildly more hawkish than what might be expected.

She is nevertheless highly unlikely to steer her messaging towards a first rate hike to September per se, or to send any calendar-specific signal on lift-off at all. Chair Yellen is instead likely to tact close to the Federal Open Market Committee’s current messaging mantra of a meeting by meeting approach in which a rate rise before year-end is a reasonable assumption and that the pace of subsequent hikes is likely to be very gradual.

But we do think she is probably going to present a reasonably favorable take on the US outlook, noting good underlying fundamentals to the US recovery with consumer confidence and spending on the rise, housing doing better, and household balance sheets in good repair; as the labor market continues to heal with labor market slack continuing to diminish, and perhaps even the faintest of signs in wage growth. On inflation, while still too low, she may affirm it should by every indication begin a slow ascent towards mandate-consistent levels in due course, with that upward path more clearly showing up in the data by next year.

We also think she will nevertheless highlight the risks to that base case, including the international risks, be it from Europe and its crisis over Greece, or China for that matter. In fact, with Greece looking like it is heading towards a deal (see our note last night, SGH 7/9/15, “Greece: Cautiously Positive”), it may be China’s turbulence with a credit bubble and a slowing economy that will raise as many new questions to the Fed’s forecast now as Europe.

But still, we continue to suspect Chair Yellen will couch her remarks on the international developments as risk to what is otherwise a reasonably upbeat base case scenario for the US recovery and a start to policy normalization. The market may seize on the cautions over those risks, but we think the more important takeaway will be in the overall thrust and tone of the confidence in the US underlying strength, even if it remains a bit shy of certain.

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