Yellen's Humphrey-Hawkins Testimony Revives Long Dollar Trade

Lucy Hill
February 15, 2017

Yellen will present the US central bank's semi-annual report on monetary policy and the economy in testimony to the Senate Banking Committee on Tuesday, followed by a the semi-annual monetary testimony before the House Financial Committee on Wednesday. The Fed raised interest rates in December for just the second time in a decade, and Yellen said the strengthening job market and a modest move higher in inflation should warrant continued, gradual increases in interest rates.

She went on to emphasize that key rate hikes will occur gradually, but did caution, "waiting too long to remove accommodation would be unwise, potentially requiring the (Fed) to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession". Pat Toomey, R-Penn., told Yellen.

Yellen's comments indicated she sees the time to start to shrink the balance sheet "as far off", said Michael Gapen, chief USA economist at Barclays, said in a research note.

Still, Yellen's language was a bit surprising after she spent most of a year ago talking about asymmetric risks being to the downside, since the Fed has little traditional ammunition with its key rate still near zero.

In her semiannual report to the Senate Banking Committee, Yellen said that the USA labor market continues to strengthen, but she urged the government to focus on improving the long-run productivity of the economy. Greenspan spent almost two decades as Fed chairman during the period that came to be known as the "Great Moderation", which continued until the 2007-08 financial crisis brought it crashing to a halt.

"There could be a lot of turnover on the Fed in the next couple of years, but I would say that the Trump administration needs to think really carefully about the people they put up as nominees", said Stephen Oliner, a resident scholar at the American Enterprise Institute.

Humana and Aetna call off $34 billion buyout
In a response, Anthem said that under the terms of the merger agreement, Cigna does not have a right to terminate the agreement. Anthem last week filed an appeal of the court's ruling, but expectations for winning are seen as scant.

Yellen said the Fed is likely to raise interest rates at coming meeting if the economy cooperates. That is why there is more and more discussion in markets about whether the Fed is behind the curve or not.

Yellen's semi-annual monetary policy report before the Senate Banking Committee is the first since Donald Trump became president.

The U.S. economy now warrants "significantly higher rates", Richmond Fed President Jeffrey Lacker said in comments at the University of Delaware.

Little was changed in the central bank's February 1 policy statement, a reflection of how little insight Fed officials have into Trump's policies.

"I see well-capitalized banks that are regarded as safe, sound and strong", Yellen said, adding this gives them a "competitive advantage".

"It's actually a very wise move to try to get the rate hikes going sooner rather than later to cut off the potential for inflation, although I really don't see inflation picking up all that much over the next year or so", said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. Her comments on the possible pace of rate hikes gave the United States dollars a boost even if what she said is nothing new.

Other reports by TheDailyFarc

Discuss This Article