Tuesday, February 11, 2014

Welcome Janet Yellen

Fed Chairperson, Janet Yellen
 (US) Preview: New Fed Chair Janet Yellen's House testimony released at 08:30ET, ahead of 10:00ET hearing.  Yellen is making her first Congressional appearance since being sworn in as the Fed Chair last week, meeting with a House panel today and a Senate panel on Thursday. The annual Congressional hearings are being held a few weeks earlier than usual, and just two weeks after the last FOMC policy meeting, reducing the chances of a surprise shift in policy outlook today. She is expected to note a slowly improving employment trends coupled with stable inflation as reasons for optimism. 



The hearing comes at a time when markets are readjusting to cope with the Fed's plans to taper QE, which has contributed to some emerging market turmoil in recent weeks. Yellen will likely tell the Congressmen again that tapering is not on a set path, remaining data dependent, but could imply that at the current rate of $10B of tapering per meeting it may wrap up by year end. She's also likely to stress that near-zero interest rates will not be raised any time soon, and downplay the unemployment threshold since jobs growth remains underwhelming. 

The Chair could give some insight into the evolution of the Fed's forward guidance given that unemployment is nearing the 6.5% policy threshold, though the Fed seems to have convinced markets that the threshold is not a trigger for rate action. Yellen will likely be grilled about the employment situation after the second lackluster payrolls report in a row, but she will likely stick with the Fed mantra that one report does not make a trend, and the Fed will have new numerous data points in hand by the next FOMC meeting arrives on March 19-20th. 

Congressmen could also try to draw her into the political debates on the Hill like the latest debt ceiling debate, giving her the opportunity to urge legislators to get their fiscal house in order over the long term without endangering the economic recovery in the near term. She could also questions about plans for the eventual reduction of the $4T Fed balance sheet, which several Fed officials have recently said will shrink, but not back to the pre-crisis level of less than $1T. She will also field questions on an array of rate related questions including concerns that near-zero rates are hurting savers.

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