Fedspeak overnight reviewed - Nomura

Analysts at Nomura offered a review of the Fedspeak overnight that fuelled the dollar's fire.

Key Quotes:

"At the Semiannual Monetary Policy Report to the Congress today, Chair Yellen testified before the Senate Banking Committee. As for the pace of policy rate adjustment, she said that at the “upcoming meetings”, it would be appropriate to raise federal funds rate if the FOMC judge that employment and inflation are continuing to evolve in line with their expectations.

However, Chair Yellen did not mention anything specifically relevant to the decision in March. Another “hawkish” comment within the prepared statement was that she described the current stance of monetary policy as “accommodative.” In her last speech at Stanford in January, she said, "The Committee judges, however, that the stance of monetary policy remains modestly accommodative" (Italicized by Nomura). Today, she stated "... U.S. monetary policy remains accommodative ...”. This is a subtle change but still a shift toward a marginally "hawkish" direction.

During the Q&A, the most interesting part was Yellen’s answer to the question on the course of the Fed’s balance sheet. She indicated that although the FOMC had previously stated that the balance sheet would shrink within a longer term, the Committee would not want to use fluctuations in balance sheet to manage monetary policy.

She further stated that the Fed will stop reinvestments or diminish them to allow the balance sheet to shrink only after the Committee gains the confidence that “the economy is on a solid course, and that the federal funds rate has reached levels where we have some ability to address weakness by cutting it.” This remark indicates that it takes longer for the Fed to start reducing its balance sheet."

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