Investing.com – Amid a total of 20 appearances by members of the Federal Reserve (Fed) this week, investors looked ahead to chair Janet Yellen’s testimony to the Joint Economic Committee of Congress at 10:00AM ET (15:00GMT) on Thursday for hints on the Fed chief’s outlook for the future path of monetary policy.
In her prepared remarks, scheduled to be pre-released at 8:00AM ET (13:00GMT), Yellen was widely expected to follow the script already laid down by other Fed policymakers to signal a strong likelihood of a rate hike at the December 13-14 ,barring any unexpected shocks to the U.S. economy in the next month.
Impact from Trump election on Fed policy is null
Several Fed officials since the November 8 surprise election of Republican Donald Trump to the U.S. presidency had commented that the outcome had no immediate effect on their policy stance.
Immediately after the election results were known, San Francisco Fed president John Williams said, "I don't see any change in how I approach monetary policy.”
“It's really driven by the data," he explained.
Along the same lines, there is uncertainty over exactly what type of policies the President-elect will be able to enact once he takes office.
"The prospects for some kind of fiscal policy change have likely risen, but we don't know the timing of those policies or the form of those policies whether it's immigration or tax reform or infrastructure spending or trade policy," Cleveland Fed president Loretta Mester said late Wednesday.
Earlier this week, the head of the Dallas Fed Robert Kaplan made similar remarks:
"There are some potential policies that would be positive for GDP; there are some potential policies that might be negative for GDP; and I don’t know which ones, nor does the country."
Amid this uncertainty, the Fed clearly indicated that it would monitor the situation and the economy’s reaction to it, rather than proceeding based on speculation.
Last Friday, Fed vice chair Stanley Fischer declared, "Of course we will watch events and depending on how the market turns out and how the economy turns out we will adjust our policy if we think that's necessary."
“We don't want to be pushing on the brakes harder than we need to," Fed governor Daniel Tarullo commented on Tuesday.
“Give the administration time to propose its program and Congress to decide," he suggested.
According to St. Louis Fed president James Bullard, any new infrastructure spending and changes to taxes or regulation wouldn’t affect growth until 2018-2020.
In that light, Yellen would likely follow her colleagues’ comments and insist that the U.S. central bank will monitor any policy changes and react, if necessary, to the impact on the data.
That is not to say, that Trump policies will not affect Fed monetary policy, just that they are on hold to see the outcome of the changes.
Richmond Fed president Jeffrey Lacker did warn however that possible fiscal stimulus under the incoming Trump administration could cause the Fed to raise interest rates faster than anticipated.
“If a more stimulative fiscal stance would materialize that would bolster the case for raising rates,” he said on Monday.
“As a general matter, doing monetary policy with a more stimulative fiscal outlook usually warrants higher policy rates,” he explained.
Could Yellen give hints on December rate hike?
A wave of Fed officials have already commented on the likelihood of a rate hike at the December 13-14 meeting, with markets currently pricing in the odds at 85.8%, according to Investing.com's Fed Rate Monitor Tool.
At the November 2 decision, two of the 10 Fed officials with voting rights, Mester and Kansas City Fed president Esther George, dissented based on their preference for a 25 basis point hike to 0.50%-0.75% and are widely expected to hold their positions.
Boston Fed president Eric Rosengren had dissented at the previous meeting, calling for the same amount of tightening, but changed his mind in the November meeting and supported the call to maintain.
He explained last Tuesday that his decision was due to the fact that changes in the Fed statement "were well aligned with the notion (and the market perception) of a high likelihood of tightening in December."
“Absent significant negative economic news over the next month, the market's assessment of the likelihood of tightening in December seems plausible," Rosengren explained.
New York Fed president William Dudley, a voting member who is considered most akin to Yellen’s thinking, had already remarked prior to the November meeting that the economy was “reasonably close” to the Fed’s goals of 2% inflation and maximum sustainable employment.
"If the economy stays on its current trajectory I think ... we'll see an interest rate hike later this year," he said.
Fischer, number two at the Fed, said just last Friday that “the case for removing accommodation gradually is quite strong,” suggesting that the Fed would be ready to move.
Kaplan, who will join the voting committee in 2017, said just last Monday it is "appropriate" for the Fed to raise interest rates in the near future.
"I think you'll see us in the near future remove some accommodation," he commented.
Only a "pretty sizable" negative surprise would dissuade the central bank from hiking interest rates in December given the improved economic data since June, Chicago Fed chief Charles Evans said last week.
"It would probably take something pretty sizable to change my assessment that a December move is consistent with a shallow path," Evans, not a voting member this year but scheduled to enter the voting committee in 2017, commented.
Bullard, who is a voting member, said Wednesday that given the current state of the economy some economic shock would be needed in order for the Fed to remain on hold.
"You would have to have a surprise at this point," for the Fed not to increase rates, Bullard told reporters at a UBS banking conference in London on Wednesday.
Given the sizeable number of Fed members who have indicated that it was time to return to policy normalization for the first time in 2016 and only the second time since the financial crisis, it is unlikely that Yellen will rock the boat on Thursday in either her pre-released speech or her later remarks to Congress.
In the minutes from the November meeting, the Fed noted that “the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives.”
In that light, Yellen is apt to follow the script already set down by her Fed colleagues by indicating that the case has for a rate hike has become stronger, but will also likely take a cautious stance, insisting that any final decision to move will be based on incoming data over the next month.