U.S. Federal Reserve Chair Janet Yellen painted a rosy portrait of the U.S. economy to Congress yesterday, hinting that monetary tightening may take place faster than initially anticipated. Ms. Yellen stated that it would be unwise to wait too long before raising interest rates and also encouraged the Trump administration to exercise budgetary caution. The futures market is pricing the likelihood of at least one rate hike by the March, May and June Fed meetings at 34%, 53% and 74% respectively.
Yellen also noted that action will eventually have to be taken to reduce the size of the Federal Reserve’s balance sheet, which currently exceeds $4,500 billion. A faster-than-anticipated trimming of the Fed’s balance sheet could have a substantial impact on the long-term segment of the yield curve and play a role in hindering U.S. economic growth by increasing long-term borrowing costs.
Today, we’ll be keeping an eye on further comments by Janet Yellen to the House of Representatives and remarks from three influential Fed members. The U.S. dollar continues to climb this morning against most of the major currencies.
