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Yellen’s Speech Balances Stable Growth with Unstable Trump

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Fed Chairwoman Janet Yellen testified before Congress today with a hawkish tone that sent gold prices downward and bond yields upwards prior and during her testimony. Gold spot prices were down around $11/oz. toward the end of Yellen’s testimony. The 10-year note rose to 2.5% from 2.43% while the 2-year note yield jumped to as high as 1.25 % from a low of 1.18% during her speech, according to CNBC.

Yellen’s comments strengthened the likelihood of interest rate increases for the foreseeable future, stating that “waiting too long” would be “unwise”. She qualified her comments with the warning that raising rates too rapidly could “risk disrupting financial markets and push the economy into recession.”

But we’ve heard such data dependent, optimistic statements before. Last year’s rhetoric had a similar ring. Yellen’s strategy has always been to create just enough possibility of a rate increase to keep investors hopeful, but leave enough doubt to excuse the FOMC for not delivering. Even when the Fed delivers, as they did last December, a quarter point doesn’t even begin to approach normalizing rates. The economic woes of 2017 will more likely force the Fed to walk back their December hike rather than move forward with another.

Like the neutral federal funds rate, which she stated is “neither expansionary nor contractionary,” Yellen’s comments seemed to balance optimism for the US’s economic future with the unknown realities of future executive orders and policies.

The Chairwoman blamed the necessity for a low interest rate policy on “slow productivity growth, subdued economic growth abroad, strong demand for safe longer-term assets, and other factors,” adding the FOMC expects these “depressing” effects to “diminish somewhat over time” and allow the slow raising of interest rates, albeit to levels “still low by historical standards.”

In central banking speak, this means the FOMC has a difficult road ahead to get markets off of their addiction to cheap money, even though central bankers are the suppliers. How can a heroine dealer blame his customer for becoming addicted?

Much of Yellen’s speech was a rerun of last year’s, with further rate increases being “appropriate” if benchmarks and conditions stay the same. However, there’s now a Trump Card in the game, and no one knows when the next one will be played, particularly the President’s stimulus plan.

Although Yellen was careful not to make policy recommendations for congress, despite their constant asking, she did send some glancing blows to Trump’s proposed stimulus, wall construction, etc. that would raise the national debt substantially. She urged congress members to focus on the debt, suggesting they put the country’s growing debt on a “sustainable trajectory”, according to CNBC.

She also added a thinly veiled reference to the chaos of Trump’s administration and it’s potential effects on the economy, “Of course, it is too early to know what policy changes will be put in place or how their economic effects will unfold,” she stated. “While it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic growth and raising American living standards with policies aimed at improving productivity.”
 

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