The Signal From Yellen's Testimony - Views From 10 Major Banks

The following are the reactions to today's Fed Yellen Congressional testimony as provided by the economists and FX strategists at 10 major banks.

Goldman: Yellen is clearly preparing grounds for changes to fwd guidance though not clear when. She dispels idea that removing guidance signals a hike two meetings later. Nothing new on economy, mainly reiteration of things they have discussed before: Labor market improved & inflation below longer term trend. Bottom line: nothing new in any of this as far as we can see.

BNPP: Chair Yellen declined to provide much insight into when the word might be dropped and instead emphasized that dropping patient would not necessarily mean that rate hikes were imminent, just that they would be evaluated on a meeting-to-meeting basis. Notwithstanding the initial reaction to the testimony, we think the message from the Fed is broadly supportive for the USD. The central bank is clearly laying the groundwork for rate hikes to begin this year, as long as the Committee is reasonably confident that inflation will move back above 2% over the medium term.

Citi: The testimony is a cautious move by the FOMC to prepare the market for a move towards normalization, without a precommitment to do so just yet. Overall, we see this shift (even if glacial) towards a rate normalization as USD positive, but other conditions need to be met as well. The USD weakening immediately after the statement release highlights a disappointment by a minority of short term expectations seeking patience to be removed today. Instead, today’s testimony is a necessary signal from the Fed that is continues to move toward normalization – and the first of three key goalposts we would expect for a second USD move (the February NFP and March FOMC statement are the next two). A strong NFP report in March would of course imply that patience could be dropped later that month. Hence, data watching remains paramount. Removing patience would imply market pricing would have to shift from September to June.

Deutsche Bank: The most important passage in Yellen’s prepared remarks suggests to us the Fed is going to moderate its forward guidance at next month’s meeting. This keeps a June rate hike in play, provided the data unfold in the manner that we expect. The Fed wants maximum flexibility and does not want to be bound to date-dependent language.

Barclays: We read Fed Chair Janet Yellen’s prepared testimony to the Senate as indicating the Fed is readying a change in its forward guidance, which we see coming at the March meeting. However, the Fed is also saying that such a change in March would not automatically signal a rate hike in June, but, instead, would open the door for rate hikes in June or after, depending on the incoming data flow. We retain our call for a rate hike in June and look for the committee to alter the March statement by removing “patient” in favor of other language that suggests full data dependency. Risks to our forecast skew in the direction of a later take-off, especially if the downward pressure on core inflation from a stronger dollar is greater than expected

Danske: We expect ‘patience’ to be removed in March to give the Fed flexibility to hike in June. We also continue to look for a hike in June based on continued robust employment gains and decent GDP growth rates. Risks are, however, still skewed towards a hike later (July or September). Yellen’s testimony and our view that the Fed will begin lift-off in June supports our call of a broadly stronger USD over the coming 3-6 months. In our view, the USD should strengthen as long as we are waiting for the first rate hike, particularly versus currencies which are backed by ultra-loose monetary policy, such as EUR, JPY, CHF and SEK. We forecast EUR/USD at 1.12 in 1M, 1.11 in 3M and 1.10 in 6M, with USD/JPY expected to shoot higher to 120 in 1M, 124 in 3M and 125 in 6M.

Credit Agricole: Fed Chair Yellen’s positive comments on labor market conditions suggest that the FOMC believes it will soon approach employment conditions that are consistent with its employment mandate. Progress on the inflation mandate has been delayed, primarily because of lower oil prices. Given the Fed’s clarification that a change in guidance would not necessarily signal a rate hike in a couple of meetings, the Fed could easily drop the “patient” forward guidance language from the March meeting statement. We maintain our view that the rate lift-off is most likely to happen in Q3 when the data give the FOMC confidence that inflation will return towards the 2% target over the medium term.

CIBC: Echoing to her previous comments, Yellen stressed that the use of the word “patience” means the Fed is unlikely to raise rates for at least two meetings. Clarifying things, Yellen also emphasized that when the guidance does change, that does not indicate that rates will begin the rise in two meetings time. After the guidance changes, the Fed will consider the data on a “meeting by meeting” basis before acting, stressing effectively that the timing of liftoff would still be data dependent. By way of economic commentary, the Chair stressed that the employment situation has been improving on “many dimensions”. Sluggish wage growth and underemployment nonetheless remain a concern, suggesting the Fed still sees room for improvement. Spending and production are described as increasing at a “solid rate”. Echoing the statement, Yellen also noted that inflation is expected to dip further in the near term. The Fed will begin lifting rates when it is reasonably confident that inflation is on a patch back towards the target. Some clarification on the meaning of the Fed’s current guidance, but otherwise not a lot of new material.

SEB: In her statement before Congress today Fed Chair Janet Yellen paved the way to remove “patient” at the March meeting. The FOMC assessment thus far has been that it can be patient in beginning to normalize monetary policy. What this means is that the committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings. Since we believe that June still is on the table with respect to liftoff, it is likely that the current patient language will be dropped at the next FOMC meeting in March.

NAB: Janet Yellen came and went overnights, and in truth markets are not a whole lot wiser on the question of when the Fed is likely to start normalising monetary policy. That said markets don’t lie, and the ‘bond market vigilantes’ that are Wall Street’s Treasury traders have seen fit to push the 10-year yield back below 2% (1.98%) from 2.13% on Monday, while an initial back-up in shorter end yields has been more than reversed, the 2 year note rising from 0.62% to 0.64% before falling to 0.56%, down 6bps on the night. These move in turn has seen initial support for the US dollar as Yellen began her testimony, more than reversed, while the S&P 500 has pushed on to new record closing high, +0.25% to 2115 - moves all consistent with increased doubt that the Fed will make a first move as early as June.

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