Currency Briefing: What Yellen testimony told markets?
In her first monetary policy presentation as Fed chair, Janet Yellen’s primary message to the US Congress was that markets and the public should “expect a great deal of continuity” from the FOMC in the months ahead. The ‘business as usual’ stance came as little surprise, given that Yellen has been a key architect of the current policy strategy of monetary stimulus and has hitherto stated her strong support for the Fed’s dual mandate. She acknowledged recent EM turmoil and the softer jobs data but gave no sign that the economic outlook is altering policy plans.
Noting the absence of any new direction from the Fed Chair, Citi analysts argued in a research note that Yellen’s indicated approach was consistent with the latest forecasts and judgments in policy statements. The new Fed boss has yet to preside over her first FOMC meeting and developments in recent weeks did not necessitate a change in guidance or tapering plans.
Asked about soft payrolls, Yellen urged caution in their interpretation in light of recent weather extremes and the broader strength in the economy beyond recent letdowns.
She avoided mentioning that unemployment is very close to the Fed’s 6.5 percent threshold, emphasizing instead that recovery in the job market is “far from complete.” Everyone following the participation rate would agree on that.
Crossing below the 6.5 percent threshold or the two per cent inflation threshold will not trigger a rate hike in Ms Yellen’s book, reiterating as she did qualitative guidance for a long waiting period. According to Citi’s analysts, a lowering of the jobless threshold is unlikely and the yardstick would be better abandoned.
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In any event, Yellen is expected to continue looking at a wide set of labour market indicators, not just the unemployment rate. Citi’s research paper suggests that any rate hikes might be expected towards mid-2015, at which time unemployment may be below six percent. But, the Citi experts argue, looking at a “wide set of labor indicators” is already a change in guidance, since the falling unemployment rate in recent months indicates a falling participation rate, which is far from being a good economic indicator.
Today, the main focus will be on the release of the Bank of England’s quarterly inflation report and governor Carney’s media appearance, both scheduled for 10:30 UTC. The report typically contains the detailed economic analysis and inflation projections on which the Bank’s Monetary Policy Committee (MPC) bases its interest rate decisions, and presents an assessment of the prospects for UK inflation.
Today’s report is unlikely to provide any drama, given the BoE’s existing forward guidance that the jobs market is not strong enough to support an interest rate hike.
Later today, European Central Bank president Mario Draghi is to participate in a conference marking the 20th anniversary of the establishment of the European Monetary Institute. Draghi will conclude proceedings with a keynote speech starting at 15:30 UTC.