Dollar and treasury yields rise on hawkish Yellen speech

Lucy Hill
February 15, 2017

However, Yellen said it was "too early" to know what policies US President Donald Trump's administration would follow or their potential effect on the Fed's outlook, renewing a call for fiscal policy which would boost US productivity. The proposals are expected to include deep tax cuts, stimulus spending, trade actions, and deregulation.

And she repeated her previous warning that it would be "unwise" for the Fed to delay too long in rising rates because this could force the United States central bank to raise rates rapidly "which could risk disrupting financial markets and pushing the economy into recession". Yellen stated that "rate hikes will be evaluated at upcoming meetings" and that "waiting too long to raise rates would be unwise".

Speaking in the Senate on Tuesday, Fed Chairwoman Janet Yellen gave an upbeat assessment of the economy.

"Yellen played a straight bat and broadly reiterated her previous messaging, forecasting ongoing progress toward the Fed's goals and gradual policy tightening", Bank of New Zealand currency strategist Jason Wong said in a note.

In December, when interest rates in the USA went up by 0.25%, the central bank said it would raise rates again up to three times in 2017.

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She said that changes in United States fiscal and other policies, the future path of productivity growth, and developments overseas were sources of uncertainty, and said that more interest rate hikes may be appropriate in upcoming meetings if employment and inflation continues to evolve in line with the Fed's expectations.

Yellen said growth is "moderate" as the job market improves and inflation gradually move up the Fed's 2 percent target.

Not surprisingly, investors cheered this signal that the Fed meant to keep a respectful distance behind the market, and that in deciding its interest rate policy, it would follow investor expectations, rather than taking the lead.

Over the weekend Fed Vice Chair Stanley Fischer said there was significant uncertainty about USA fiscal policy under the Trump administration, but that the Fed would be strict in meeting targets of creating full employment and getting inflation to 2 percent, according to Reuters. If that were to happen, the central bank could decide to accelerate its rate hikes. Ten-year Treasuries yield about 2.41%, down from 2.64%-the highest since 2014-reached the day after the Fed increased rates in December. Yellen has been a staunch defender of the law.

Yellen's hawkish tone dovetailed with recent comments from other Fed officials. "The Fed originally said three [rate hikes] so March could be swing month, but you still have economic numbers and the jobs report and maybe some clarification on tax policies before then". There are now two empty seats on the seven-member body, and Fed Governor Daniel Tarullo said on Friday he would resign around early April. With Tarullo's exit and the selection of a successor, Trump and likeminded Republicans in Congress could be able to soften the Fed's approach to regulation.

Other reports by TheDailyFarc

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