Yellen pulls a dove out of the Fed's hat
Matt Weller, CFA, CMT March 29, 2016 1:30 PM
As we noted yesterday, market volatility was expected to pick up as we moved through the week as the top-tier data releases and traders at their desks gradually ramped up. Today we’re getting our first look at that phenomenon, with Federal Reserve Chair Janet Yellen making some waves at her speech to the Economic Club of New York.
In typical Janet Yellen fashion, the chairwoman came off as exceedingly cautious on the outlook for the US economy [emphasis mine]:
- Inflation expectations may have drifted lower; concerned by low inflation readings
- The decline in some inflation indicators has heightened the risk that stable price expectations could be wrong
- Committee should ‘proceed cautiously’ in raising interest rates
- Caution "especially warranted" given low interest rates
- Current neutral real interest rate likely close to zero
- Fed "would still have considerable scope" to ease policy even if rates return to zero
- Fed used non-conventional monetary policy tools in prevoius recovery, would do so again
- The impact of global turmoil on the US is likely low, kept down interest rate expectations
- Further declines in oil prices could have "adverse" effects on the global economy
- I couldn't have imagined 6-7 years ago we would still be employing similar policies
- It would be certainly helpful to see fiscal policy play a larger role
If the comments about "non-conventional monetary policy tools" (read: another round of quantitative easing) and the potential for interest rates to return to zero didn’t tip you off, this is a very dovish statement. Though she is just one of many voting members of the FOMC, her views typically reflect the influential "core" of the Fed, so many traders are taking this as a sign that we may not see any further interest rate hikes in the US until 2017. Indeed, fed funds futures traders have revised down the implied probability of a June rate hike to just 28%, and "only" a 71% chance of another rate hike at all this year. In other words, the Fed’s interest rate projections suggest that the central bank is back to wearing its rose-colored glasses on the US economy, at least relative to the market’s expectations.
The market impact of the more-dovish-than-expected speech was sharp and immediate. The US dollar index fell by 0.6% in the immediate aftermath as traders pushed back their rate hike timelines, and this drop in the greenback helped just about every other major asset class. US equities have turned solidly higher after spending the morning in negative territory, the benchmark 10-year US treasury yield is now down 6 bps on the day (bonds are rising), and even gold and oil have caught a bid, though oil still remains in negative territory on the day.
Intraday traders should definitely make note of these moves, but the market’s focus will quickly shift toward the rest of this week’s data, including ADP employment tomorrow, a speech by BOE Governor Carney, Eurozone CPI figures and Chinese PMI figures on Thursday, and of course, the critical US Non-Farm Payrolls report on Friday.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.