Posted March 30, 2016 Ashley Chadwick
Janet Yellen spoke in front of the Economic club of New York on Tuesday (29th March), on the state of the US Economy and Monetary Policy. The tone of the meeting was more Dovish than was expected. Whilst other members of the Fed have indicated in recent comments that the April meeting is ‘live’, meaning rates could rise then. Both Lockhart and Williams said the next rate rise could occur as early as April and that given steady data June was a decent possibility. Yellen shied away from this idea, instead she reiterated her belief that the Federal Reserve needed to ‘proceed cautiously’, when it came to interest rate rises, citing unfavourable market conditions and concerns over global growth.
Earlier in March, at the last meeting, the Federal reserve had lowered their median forecast from 4 rate hikes in 2016 down to just 2. Yet the Federal Funds market still believe this is an overestimation. After the speech, Fed Fund Futures were indicating a 52% chance of a rate rise by September, down from 59% and that rates would only reach 1% in the second half of 2018. The speech also caused the dollar to weaken and stocks to rally off their lows, with the S&P climbing 0.4% during the speech.
Yellen also focussed on the uncertain inflation outlook for America. Inflation is currently 1.7%, below the 2% target and the latest expectations are for inflation to average 1.65% over the next decade. If inflation expectations are so low and the actual rate remains below target, it is difficult to see when a rate rise would be warranted. The concern is that unemployment is falling and that there is little spare capacity left in the economy and when spare capacity begins to run out, wage growth and therefore inflation will rise. The median estimate for the long term rate of unemployment currently stands at 4.8%, just below the current 4.9% unemployment rate. Yellen indicated that the estimates for the long term rate could be high and therefore there is more room for unemployment to fall without triggering inflation.
Yellen did also ponder on the possibility that the Fed could be called on to lower rates in the future, stating, ‘If the expansion was to falter or if inflation was to remain stubbornly low, the [Fed] would be able to provide only a modest degree of additional stimulus by cutting the federal funds rate back to near zero’. Again this was dovish rhetoric, however, she stopped short of discussing the possibility of following in the footsteps of other major central banks in implementing negative rates.
Overall Yellen appeared to strike a cautious tone and did not seek to prepare the markets for an imminent rate rise.