- Fed Chair Yellen will deliver the semi-annual monetary policy testimony to Congress…
- … we expect a somewhat more hawkish tone compared to the FOMC minutes
- In Europe, Greece is set to submit its reform proposal, while Germany’s Ifo rose
Yellen to strike positive tone on the economy
The spotlight will be directed to Fed Chair Janet Yellen today as she delivers the semi-annual monetary policy testimony to Congress before the Senate Banking Committee. On Wednesday, we expect identical remarks to the Committee of Financial Services in the House of Representatives. We think that Chair Yellen will strike a positive message on the current economic situation, suggesting that she is confident that the economy is on the road of sustained economic recovery. In our view, economic and financial developments have given Ms. Yellen a strong incentive to preserve policy flexibility and keep the prospect of a mid-year rate hike on the cards. Since the FOMC meeting, the labour market has continued to improve strongly, but consumption data has been a bit softer than expected. Overall though, data point to an ongoing solid outlook.
Communication on monetary policy a bit more hawkish…
The Fed Chair will likely be a bit more hawkish, compared to the somewhat dovish January FOMC minutes. Her testimony needs to prepare the public and financial markets for a rate hike later this year if the data continues to support the Fed’s forecasts. She will likely continue to highlight the importance of effective communication to maintain financial stability. We expect her to stress that the path for the federal funds rate will remain data dependent and subject to international developments. In addition, she should indicate that after lift-off, rate rises will be gradual.
…despite lower inflation
A possible reason for caution is inflation. Several factors, including lower oil prices, a stronger dollar and global disinflation have raised doubts with some FOMC members about whether the recent weakness in inflation is transitory. Thursday’s inflation report will provide more information on price developments. We expect headline and core inflation to remain subdued in the coming months, but we think that Chair Yellen will continue to signal that inflation will rise further out towards the Fed’s goal. We expect the Fed to start raising interest rates in June, but the risks are tilted to a somewhat later start.
Waiting for Greece’s reform list
Greece was scheduled to present a list of reform measures on Monday. This is the next step in the process following Friday’s conditional agreement about a four-month extension of the loan facility. Reports late on Monday suggested that there has been a delay and the list will not be submitted to eurozone finance ministers until this morning. The Eurogroup will apparently then have a teleconference this afternoon. We see Friday’s agreement as the beginning of the process rather than the end of it. Difficult negotiations lie ahead, though we expect an interim agreement and a long term deal eventually.
Germany’s Ifo business expectations higher
Ifo’s business climate indicator edged higher to 106.8 in February, from 106.7 in January. The report was more positive than this minimal rise suggests, however, as the expectations component increased more significantly, to 102.5, up from 102.0. This component is the part of the survey that moves the most in line with GDP growth. Its rise suggests that the German economy will continue to grow robustly in the coming quarters. Indeed, we expect GDP to grow at a rate of around 0.6% qoq on average this year. The drop in oil prices, the weak euro and easing financial conditions due to the ECB’s QE programme should all underpin the solid expansion of the German economy.