Fed still trembling over the yuan – Westpac

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 11, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Sean Callow, Research Analyst at Westpac, notes that the Fed chair Yellen told Congress this week that the FOMC expects that “inflation will rise to its 2 percent objective over the medium term”, noted the 4.9% unemployment rate and the 2.7 million increase in non-farm payrolls last year.

    Key Quotes

    “Yellen argued that “ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending, and global economic growth should pick up over time.” So much for the base case.

    Markets took Yellen’s testimony fairly calmly as she spoke but the main talking points afterward were the downside risks to the outlook. Yellen noted tighter financial conditions recently, which “could weigh on the outlook for economic activity and the labor market.” But more striking was the focus on the global economy.

    Famously the FOMC in Sep 2015 worried that “(r)ecent global economic and financial developments” posed a threat to growth and inflation, causing the Fed to hold steady despite many forecasts that they would raise rates, as indicated mid-2015, right until China’s currency and equities slumped in August. But tellingly, this is the first time that a Fed chair’s prepared semi-annual testimony has included the word “renminbi”.

    Since Yellen’s last semi-annual in July 2015, we have had two episodes of sudden CNY depreciation, in August and January. These were of course seismic events for FX markets but historically the Fed has paid limited attention to currencies. The US economy is rarely exportled, with trade a much lower share of GDP than in other developed economies. It usually requires a very large move in the trade-weighted US dollar to cause the Fed to pay particular attention to the implications for inflation and growth.”
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