Monday, July 17, 2017

Yellen returns to her usual dovish tone

Tapering begins soon and gradual Rate Hikes


Well, with Yellen you never know what can happen ... this time radically changed the hawkish tone that she had been carrying since the beginning of the year, due to her usual dovish thinking, betting on limiting the Rate Hikes, confirming what Brainard said yesterday, that the current growing economy with slow inflation progress, does not show clear signs of where it will evolve, and in those doubts it is better to be careful with Rate Hikes. I think it's a good decision, prudent.


She also reiterated that the reduction or tapering of the US balance sheet, of $ 4.5 trillion, will begin sometime during the year, but again without specifying dates. It is understood that, doing so, would mean stopping the Rates Hikes, to avoid an excessive rate increment in the debt markets. Although with the FOMC you never know ...

And on the rate of federal funds (which banks charge each other when they lend money, similar to Libor), estimates that this 'something low', so it is expected next increases there, to a neutral level, which don't accelerate or discourage economic activity.


The markets around the world happy with these statements (SPX + 0.75% at the moment), that is, can continue with the party. The same happens with the bonds as the TNX benchmark rate plummets to -1.86% at this time. We'll see how he reacts after today's bond auctions.

Immediate reactions of the markets today: dollar, rates, SPX and XLF finance sector.

Yellen speech


I think it is important to insert the summary of what Yellen said today in the Senate, taken from econoday.com. Highlight the main thing, which can give topic for future analysis in this blog:

There are no surprises in the text of Janet Yellen's testimony this morning as she repeats that tapering will begin sometime this year and that a limited number of gradual rate hikes will extend over the next few years. Yellen said the long-run level for the balance sheet, now at $4.5 trillion, is still unknown and that the Fed does not intend to use unwinding as a policy tool. On rates, she said the neutral rate is "quite low" by historical standards and that the funds rate doesn't have far to go to hit a neutral stance for policy.

She repeated that inflation is being held down by unusual factors (cell phones, drugs and gasoline) and that uncertainty remains when inflation will respond to high levels of employment. Yellen also warned once again against using monetary tools in a "mechanical" way. On the economy, she said odds are 50-50 whether growth proves stronger or softer than expected and she gave an upgrade to the global economy, saying it has improved.

In questions and answers, Yellen said the FOMC intends to return to a Treasury-only portfolio following the unwinding of its $1.8 trillion in mortgage-backed securities holdings. Regarding the timing of when unwinding will begin, which is generally expected at either the September or December FOMC meetings, she would only add that it should be done "relatively soon." She did, however, offer an indication on how long the unwinding will take, saying she expects it to end around 2022. On rates, she said one more hike is likely this year. She also expressed commitment to achieving the Fed's 2 percent inflation target and attributed recent price weakness to special factors, factors she warned that will hold down inflation rates until they drop off. Yellen further noted that unemployment, current at 4.4 percent, is running below what the FOMC considers to be sustainable. On her own status, she said she hasn't given further thought on her own reappointment and conceded that this may be her last semi-annual testimony (her term as chair expires in early February next year).



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