Research Team at Nomura, notes that yesterday, Fed Chair Janet Yellen delivered a speech titled, “The Outlook, Uncertainty, and Monetary Policy” to the Economic Club of New York, which essentially reiterated her views from the FOMC meeting press conference two weeks ago.
Key Quotes
“On the outlook, she explained that the Committee’s outlook was little changed in March compared with the December forecasts. Yellen argued that investors had pushed down interest rates in response to tighter financial conditions and weak growth abroad, largely offsetting the impact of those factors on the outlook. To some degree the FOMC validated those expectations by lowering its interest rate forecasts.
On risks to growth, she offered a balanced assessment. She acknowledged that recent global developments such as the weaker growth outlook in China and further volatility in commodity markets could pose downside risks to the US economic outlook. But she noted that economic conditions could be better than anticipated, especially if employment growth continued to outpace expectations.
On inflation, however, Yellen remained consistent with the dovish message she laid out at her last press conference. She reiterated that she was somewhat skeptical that the recent pickup in core inflation would continue. Moreover, she stressed the importance of inflation expectations in determining realized inflation. She noted that declines in inflation expectations in recent months were a source of concern.
All this led her to judge that it would be appropriate for the FOMC to err on the side of caution when it came to adjusting policy. She also made the argument that caution is “especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric.” She made a similar argument in her remarks at the March FOMC press conference.
During the Q&A session, Chair Yellen was asked about the Fed’s reaction function, in the context of an unemployment rate near its long-run level, solid payroll growth, and a pickup in core inflation despite unimpressive GDP growth. Yellen responded that although the Committee’s economic projections did not change much between its March and December meetings, it had downgraded its expectations for global growth. She said that the less optimistic outlook for global growth would likely have translated into “weaker growth and less progress in the labor market than would be desirable” if the stance of policy was left unchanged.
As a result, the Committee lowered its expected path of policy and kept its economic outlook largely the same as it was in December. That is, it realized that it needed a more accommodative path of policy in order to meet its objectives for employment and inflation. Yellen was explicit in saying that “we want to get ahead” of economic downdrafts from tighter financial conditions and weak growth abroad. The FOMC had to “adjust” its “thinking” about the path of policy. Yellen did mention the impact of lower global growth on the lower path of policy in the March FOMC meeting press conference but she was more explicit about its role in her answer today.
There was nothing in the speech to suggest that the Committee is closer to another rate hike than it was at its March FOMC meeting. Yellen’s speech appeared to push back on recent hawkish comments by regional Fed Presidents such as Williams (San Francisco Fed), Harker (Philadelphia Fed), Lockhart (Atlanta Fed), and Bullard (St. Louis Fed). Yellen’s remarks today reinforce our call that an April rate hike is very unlikely and the next rate hike is likely to come at the June FOMC meeting.”
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