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Yellen’s testimony: Constructive view clouded by recent developments - Unicredit

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 10, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Dr. Harm Bandholz, Research Analyst at Unicredit, suggests that the Fed Chair Yellen will deliver her semi-annual Monetary Policy Report starting today and they expect her to reiterate that further policy normalization is in the pipeline.

    Key Quotes

    “We expect her to reiterate the same two-tiered message that was provided by both the January post-meeting FOMC statement as well as by Vice Chair Stan Fischer: Further (gradual) policy normalization is in the pipeline, but most FOMC members want to see evidence that recent headwinds (e.g. from China and tighter financial conditions) do not impact the US economy before pulling the trigger again.

    With regard to the medium-term policy outlook, Yellen will most likely reiterate verbatim the following passage from the post-meeting statement (Fischer quoted it as well): “My colleagues and I anticipate that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” That outlook is based on the assumption that inflation will “rise to 2% over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.”

    At the same time, Yellen will emphasize again that the Fed’s policy decisions will be data dependent. And recent developments, notably concerns over the health of the Chinese economy and the potential impact of tighter financial market conditions, have at least clouded the Fed’s confidence in the outlook.

    We have to admit that the likelihood for a hike in March has declined perceptibly. However, we still like our forecast for a total of three hikes before the end of this year. For the market to be right (i.e. no hike by December), we probably need to see persistently weak GDP growth throughout the year, coupled with a much less dynamic labor market and a renewed downward trend in core inflation rates. We, in contrast, anticipate that GDP growth will average between 2% and 2½%, the core inflation rate will grind higher, while the unemployment rate should fall to 4½% and below.”
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