Here’s What it Means for Markets …
One of the Federal Reserve Chairman’s most, ahem, “enviable” tasks is the semi-annual appearance before Congress. I often wonder if Fed Chairs feel a little like prisoners being led to the gallows as they trek across town … take a seat before the Senate and House Banking Committees … and opine about the state of the economy, inflation, interest rate policy, and more.
The questions that follow from various Congressmen and women tell you as much as about the political climate as they do about the economy. Oftentimes, these people just want to score a few political points by bashing the Fed or talking up their pet tax and spending projects, rather than actually learn something.
The testimony the Fed Chair delivers to Congress can lead to sizable moves in stocks, currencies, and commodities.
But the prepared testimony the Fed Chair delivers first … and some of the answers that follow … can provide useful information to investors like us. They can also lead to sizable moves in everything from stocks to currencies to commodities, so that’s why I pay attention. With that in mind, what did Yellen have to say today?
First, she said in her prepared testimony the U.S. economy looks to be in pretty good shape! She noted the fall in unemployment to 5.7 percent from 10 percent during the Great Recession … the increase in the monthly pace of job creation to 280,000 at the end of 2014 … and the rise in real GDP growth to a recent pace of more than 3 percent. While she did talk about lackluster housing-related spending, she didn’t sound too concerned.
Second, she talked about how interest rates have generally declined despite the improvement in the U.S. economy, and discussed how oil prices have done the same. Her stated causes: “disappointing foreign growth and changes in monetary policy abroad” when it comes to rates, and “increased global supply” when it comes to crude.
Finally, she said that inflation has remained subdued and that not all of that stemmed from lower energy prices. She concluded that the Fed would maintain a “high degree of policy accommodation” as a result, but that the Fed continues to believe that the economy will improve, and that such improvement will require the funds rate to be adjusted before too long.