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10 Feb 2016
Yellen's testimony: the full picture - Nomura
Analysts at Nomura noted that today, Wednesday, and Thursday, Federal Reserve Chair Yellen will deliver her semiannual report on monetary policy in testimony before the House Financial Services Committee and the Senate Banking Committee.
Key Quotes:
"We expect her written testimony to be released at 8:30am Wednesday and her testimony will begin at 10:00am.
Yellen has a tough job.
The performance of financial markets and the economy since the FOMC raised rates in December has almost certainly not been what the FOMC expected.
Financial conditions have tightened and the economic data suggest some loss of momentum. Those trends were evident when the FOMC met in late January.
We expect Yellen to stick close to the message conveyed in the January FOMC statement. However, the situation has evolved since the FOMC last met, and we expect Yellen to indicate as much.
We expect Chair Yellen to make the following points:
Since December, financial conditions have tightened materially, driven primarily by developments abroad. How long this will last is unclear. The recent stress affecting banks is a new development.
The economic data received since the December FOMC meeting suggest somewhat slower growth than the Committee had expected, even before any potential impact from tighter financial conditions.
Recent declines in oil prices, and to a lesser degree the appreciation of the dollar, will affect the trajectory of inflation. The Committee is watching these developments very carefully.
Increased uncertainty about the outlook could affect decisions at upcoming meetings. (This would be a way to acknowledge that the Committee’s expectations for a hike in the near term have fallen.)
Nonetheless, the Committee is cautiously optimistic, consistent with its forecasts about the medium-term outlook. We expect Yellen to push back against any suggestion that the economy is in, or approaching, a recession. Financial Conditions Since December, financial conditions have tightened further.
U.S. equity prices have reached new lows. Perhaps more importantly, we have seen further significant tightening of credit conditions. Spreads have widened. This has spilled over to the point where survey measures of credit availability have declined.
The Federal Reserve’s Senior Loan Officer Survey (SLOS) and the National Federation of Independent Business’s (NFIB) Survey both show some signs of tightening credit standards already affecting bank borrowers. But declines in long-term interest rates and term premia provide some offset. In the past few days we have seen a spike in pressure on banks. To some degree, we think this largely reflects idiosyncratic factors and relatively illiquid markets.
We do not think that systemic risk is elevated, but the FOMC cannot wholly ignore signs of stress in the banking system. Economic data As we have noted elsewhere, recent data suggest that the economy has slowed since the FOMC raised rates in December. This moderation of economic growth was evident at the time of the January FOMC meeting."
Key Quotes:
"We expect her written testimony to be released at 8:30am Wednesday and her testimony will begin at 10:00am.
Yellen has a tough job.
The performance of financial markets and the economy since the FOMC raised rates in December has almost certainly not been what the FOMC expected.
Financial conditions have tightened and the economic data suggest some loss of momentum. Those trends were evident when the FOMC met in late January.
We expect Yellen to stick close to the message conveyed in the January FOMC statement. However, the situation has evolved since the FOMC last met, and we expect Yellen to indicate as much.
We expect Chair Yellen to make the following points:
Since December, financial conditions have tightened materially, driven primarily by developments abroad. How long this will last is unclear. The recent stress affecting banks is a new development.
The economic data received since the December FOMC meeting suggest somewhat slower growth than the Committee had expected, even before any potential impact from tighter financial conditions.
Recent declines in oil prices, and to a lesser degree the appreciation of the dollar, will affect the trajectory of inflation. The Committee is watching these developments very carefully.
Increased uncertainty about the outlook could affect decisions at upcoming meetings. (This would be a way to acknowledge that the Committee’s expectations for a hike in the near term have fallen.)
Nonetheless, the Committee is cautiously optimistic, consistent with its forecasts about the medium-term outlook. We expect Yellen to push back against any suggestion that the economy is in, or approaching, a recession. Financial Conditions Since December, financial conditions have tightened further.
U.S. equity prices have reached new lows. Perhaps more importantly, we have seen further significant tightening of credit conditions. Spreads have widened. This has spilled over to the point where survey measures of credit availability have declined.
The Federal Reserve’s Senior Loan Officer Survey (SLOS) and the National Federation of Independent Business’s (NFIB) Survey both show some signs of tightening credit standards already affecting bank borrowers. But declines in long-term interest rates and term premia provide some offset. In the past few days we have seen a spike in pressure on banks. To some degree, we think this largely reflects idiosyncratic factors and relatively illiquid markets.
We do not think that systemic risk is elevated, but the FOMC cannot wholly ignore signs of stress in the banking system. Economic data As we have noted elsewhere, recent data suggest that the economy has slowed since the FOMC raised rates in December. This moderation of economic growth was evident at the time of the January FOMC meeting."