Yellen: Sticking to the plan - Natixis

In what may be J. Yellen’s last semi-annual report to the Congress, the Fed Chairwoman maintained a view that is consistent with the Fed continuing to tighten monetary policy gradually in the near term, explains Thomas Julien, Research Analyst at Natixis.

Key Quotes

“Prepared remarks 

The views expressed in the Chairwomen’s prepared text were roughly in line with recent Fed communication: Unchanged economic outlook (with a rather upbeat view) and balanced risks. She pointed out the uncertainty on the inflation outlook as the Fed is still trying to gauge when and by how much tightness in the labor market will generate upward pressures on prices. This was perceived as a dovish message by the market but was just mentioned as an example of uncertainty the Fed is facing (along with domestic fiscal policy and global conditions). Furthermore, one of the key messages is that gradual tightening is still required with the factors holding back the neutral rate expected to fade in the medium run.”    

“Q&A 

Inflation: J. Yellen comments suggest the Fed is not worried about the recent decline in the inflation (due to transitory factors) given the increased strength in labor market. The Fed’s view is that tightening labor market will ultimately trigger upward pressures on inflation. The Chairwoman also indicated that the Fed is currently not discussing any increase in the inflation target. 

On financial conditions: J. Yellen comments were not alarmist indicating that the financial system is well capitalized without much increase in leverage even as asset prices are rising.    

The balance sheet: The normalization of the BS is not expected to be used as an active tool. It is expected to start “relatively soon”.

Once again the Chairwoman declined to comment on whether or not she will accept another Chair term if reappointed.” 

“Overall, yesterday’s comments are not adding new information with very little signalling in J. Yellen’s remarks. Comments on inflation during the Q&A were not as dovish as they were initially perceived by the market in the prepared remarks.  Looking forward, the Fed’s recent communication is consistent with our expectations: we believe the next move will be the announcement of balance sheet normalization in September followed by another hike in December.”