Investors viewed Fed Chair Janet Yellen’s testimony before the Senate Banking Committee as modestly hawkish. As such, expectations for a March rate hike rose modestly while Treasury yields climbed higher. While reiterating that all meetings are ‘live’ for a rate hike, Yellen warned that waiting too long to remove accommodation would be unwise’. Meanwhile, she cautioned over the uncertainty over the economic policy under Donald Trump’s administration. Yellen emphasized the Fed’s monetary policy stance is not based on ‘speculations’ about fiscal policy. The economy’s ‘solid progress’ is what is ‘driving the policy decisions’.
As she testified before the Senate Banking Committee, Yellen reiterated the stance that ‘waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession’. Again she noted the improvement in inflation and the labor market, the pillars of the FOMC’s dual mandate. According to Yellen, ‘incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to +2%, consistent with the Committee’s expectations. At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate’.
Despite the upbeat economic developments, US government new economic/fiscal policy presents uncertainty to the outlook. Yellen suggested that ‘it is too early to know what policy changes will be put in place or how their economic effects will unfold’. She added that ‘while it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic growth and raising American living standards with policies aimed at improving productivity’.
Market sentiment was buoyed by Yellen’s speech. In Wall Street, financial stocks led the gains with the S&P financial sector adding +0.8%. Both the benchmark DJIA and S&P 500 indices added +0.3% for the day. US Treasury prices fell, sending yields higher. 2-year yields climbed +2 bps higher to 1.23% and while 10-year yields gained +3 bps to 2.47%. US dollar extended gains against major currencies on heightened rate hike expectations.