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Markets reduce Fed rate hike bets as Yellen sidesteps policy remarks

Published 08/25/2017, 10:11 AM
Updated 08/25/2017, 10:59 AM
© Reuters.  Yellen keeps quiet about interest rates, balance sheet reduction

© Reuters. Yellen keeps quiet about interest rates, balance sheet reduction

Investing.com – Federal Reserve chair Janet Yellen made no mention of monetary policy or the economy in her highly anticipated remarks Friday at Jackson Hole Economic Symposium.

In a speech titled “Financial Stability a Decade after the Onset of the Crisis”, Yellen focused on the fact that any changes to financial regulation should be “modest” and suggested that “substantial progress” had been made on the Fed’s dual mandate.

The speech could best be described as a defense of regulatory reforms implemented since the crisis and a warning against their removal.

“Because of the reforms that strengthened our financial system, and with support from monetary and other policies, credit is available on good terms, and lending has advanced broadly in line with economic activity in recent years, contributing to today's strong economy,” Yellen explained in her remarks.

"The Federal Reserve is committed to evaluating where reforms are working and where improvements are needed to most efficiently maintain a resilient financial system," she added.

The Fed chief made no comment on the future of monetary policy with neither inflation, interest rates or balance sheet mentioned even once in the 15 page document.

Though experts widely expect the Fed to announce plans for balance sheet reduction at the next policy meeting on September 20 and repeat their call for a further rate hike this year, markets appeared to react Friday to the lack of additional details.

The dollar turned lower and extended losses following the remarks. The US dollar index, which tracks the greenback against a basket of six major rivals, was down 0.40% at 92.86 by 10:23AM ET (14:23GMT), compared to 93.22 ahead of the speech.

In a similar fashion, gold switched directions and headed higher on the lack of reference to the removal of Fed policy. At 10:28AM ET (14:28GMT), gold for December delivery on the Comex division of the New York Mercantile Exchange gained $2.84 cents, or 0.22%, to trade at $1,294.84, compared to $1,286.43 before the remarks were released.

Likewise, markets reacted to Yellen’s comments by lowering bets for a Fed rate hike this year.

Odds that the Fed would not in fact increase by another 25 basis points by the end of 2017 rose to 62.8%, from the prior chance of 54.4% for them to remain unchanged, according to Investing.com's Fed Rate Monitor Tool.

In fact, Fed fund futures now price in June 2018 as the first time the odds for a hike pass the 50% threshold, as compared to March before Yellen spoke.

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