Chair Yellen gave testimony to Congress on Wednesday. She stressed that the impact of global headwinds could hurt US growth, while focus has shifted to financial conditions. We do not expect a rate hike before June. However, we think that risks are skewed to a longer period on hold.Global-Daily-Insight-11-February1.pdf (231 KB)
Cautious tone due to impact of global headwinds on US economy
Chair Yellen presented her statement to the Committee of Finance on Wednesday, showing that her concerns are centered on international developments and their impact on US financial conditions, which have become less supportive of growth. This, she mentioned, is the result of the decline in equity prices, higher borrowing rates for riskier borrowers and the appreciation of the US dollar.
Focus on financial conditions, suggests delay of rate hikes most likely…
Chair Yellen’s focus on financial conditions was extensively elaborated in the Monetary Policy Report that accompanied the statement. The statement, as well as the report mentioned the complications in China’s exchange rate policy to allow market forces to play a larger role, was one of the triggers for investors to focus on downside risks in the global economy, exacerbating concerns for global growth outlook and tighter financial conditions. The focus on financial conditions shows that the bar has risen for further tightening. Although there was no mention of a rate hike in the next meeting, global headwinds are still ongoing, making it difficult for the Fed to assess the impact on the economy. As a result, the FOMC will need more time and therefore a March rate hike seems unlikely.
…but gradual adjustments in monetary policy still on the cards
Chair Yellens’s outlook on the labour market and inflation was similar to that expressed in December’s FOMC meeting. The labour market continues to make progress, mentioning that there was room for further improvement. Meanwhile, inflation remains low as a result of further declines in energy prices. Nevertheless, the FOMC expects inflation to pick up over the medium term. In her statement she still considers that low oil prices could boost the US economy. Chair Yellen mentioned that if the domestic economy expands at a moderate pace, supporting employment gains and faster wage growth, then the FOMC still expects gradual adjustments in the stance of monetary policy.
Risks are skewed to a longer period on hold
We do not expect a rate hike before June, but the focus on financial conditions, suggest that the bar for a rate hike has risen. Other Fed members have also expressed a cautious tone as a result of the turbulence in financial markets, which has escalated since the beginning of the year. If these developments prove persistent it is unlikely that the US economy will be spared. This could even delay the next rate hike further than we expect.