Currency Briefing: Chair Yellen steps up today
One of the first and most vital decisions that Janet Yellen needs to make as the new ‘Chair’ (and not ‘Chairwoman’, as she has recently instructed staff) of the US Federal Reserve System is what to do with the unemployment threshold set in December 2012 at 6.5 per cent. Will the Fed lower the benchmark or drop it completely as irrelevant going forward? Last week US unemployment fell to 6.6 per cent, close to the threshold but non-farm payrolls growth in January was muted for a second consecutive month.
The markets will today pay particularly close attention to Ms Yellen’s appearance before the House Financial Services Committee, it being the first opportunity to hear her interpretation of the labour market. Yellen’s prepared remarks will be released at 13:30 UTC, some 90 minutes before she offers her first public testimony at the helm of the world’s largest central bank. According to analysts, Yellen will communicate that the Fed is keeping all its options open as it watches how the US economy develops. Investors will doubtless be looking for additional clarity.
Yellen will almost certainly be asked about the Fed’s plans for the 6.5 per cent unemployment rate threshold and she is just as likely to kick the question down the road, to the next FOMC meeting in March. Yet it will be difficult to deflect such questions from Congress without offering some guidance on monetary policy.
Certainly the markets will be anxious to hear whether Yellen is of a mind to deviate from the message communicated by Ben Bernanke late last year, namely, that the Fed thinks the economic outlook bright enough to tolerate a slight decrease in monetary stimulus but that rates should stay low to fuel a still-fragile recovery.
After today’s session in the lower house, Yellen has a second opportunity this week to articulate the Fed’s plans, with her appearance before the Senate Banking Committee on Thursday. And then in March she will preside over her first FOMC meeting and hold her first news conference.
Three are a couple of other important issues on which Yellen will likely be pressed today and again on Thursday. The first is the outlook for the economy. There is concern in the markets that 2014 may not prove to be the flourishing year that many pundits had foreseen, especially prior to the December and January jobs data.
Are you looking for fast-news, hot-tips and market analysis? Sign-up for the Invezz newsletter, today.
It’s to be expected of course that Yellen will stick to the optimistic Fed script, since a bearish message could upset investor confidence and create market turmoil, both locally and abroad. Yellen will probably tilt to the FOMC language from last month, with its references to “encouraging trends” in consumer spending and business investment.
A second issue likely to be raised is emerging markets, with the Fed showing scant sympathy for EM currency devaluations in its January policy statement. Yellen could be expected to observe that the Fed’s mandate is to maximize employment and ensure price stability in the United States and not anywhere else, but she will likely add some reassurance for international investors that the Fed is closely monitoring emerging markets for any signs that turbulence there threatens US economic recovery.
Then there are the bond purchases and the Fed’s existing plan to progressively reduce stimulus throughout 2014 even should the economy falter. In this respect, market observers aren’t expecting any deviation from the Fed’s official line, namely, that reductions in bond purchases are “not on a preset course” and are dependent on how the economy and job market progress.
Finally, Yellen will be asked about short term interest rates. The likelihood is that she will restate the Fed’s expectation of keeping short term rates at record lows “well past” the cessation of quantitative easing. She is bound to point to a labour participation rate which is near the low recorded way back in 1978. And she will likely be obliged to give some indication of how, in that circumstance, the Fed plans to respond to an unemployment threshold seemingly being reached far sooner than as foreseen by the Fed in December 2012.
However today’s Congressional hearing goes, the markets are likely to have much food for thought from the new Fed chair.
*Editing by Frank Quin*