Initial Comments:- High degree of accommodation remains warranted
- Labor market conditions are far from satisfactory
- Inflation persisting below 2% ‘could pose risks’
- Forecasts faster growth this year than in 2013
- Housing market data is disappointing
- Flattening out in housing data may pose risk
- Reasons for first quarter slowdown may be transitory
- Low rates may prompt investors to reach for yield
- Equities, broad types of assets priced within norm
- Leverage ‘subdued’ within financial sector
Key Q&A Comments:
- Fed taper will continue (in measured steps) as long as the economy improves
- First rate hike hinges on the progress towards the Fed’s mandate
- ‘There is no specific timeline’ for rate increases
- Fed likely to raise IOER after raising main rate, IOER likely to be ‘key policy tool’
- MBS holdings likely to decline over some years, but Fed does not intend to sell
- Volcker period ‘very real for FOMC
- Congress should take prospects of rising rates into account in regards to fiscal policy
- Work needed to achieve fiscal sustainability
- If labor market improves, QE likely to end this year
- Prefers reviewing labor data over three or six months
- Labor participation has been ‘roughly stable’
Fed Chair Yellen repeated many previous remarks at the testimony in front of Congress today and remained incredibly cautious in her language in regards to future rate hikes. It is notable that Chair Yellen discussed fiscal policy to more a degree than she has prior. It was said that work would be needed in regards to fiscal sustainability and that in the context of riding rates, Congress should address fiscal policy accordingly. More comments were made on the Fed’s mortgage backed security holdings as Yellen stated that the Fed did not intend to sell holdings, but that holdings would decrease vis-à-vis maturing MBS.
Although equities pulled off intraday lows, yields continued to fall and any spike higher in Yen crosses was quickly sold. At the time of this report, 10-year yields are at 2.586% vs. intraday high of 2.614%.
Source: FXCM Marketscope
Gregory Marks, DailyFX Research Team