Fed chair Yellen to bal­ance con­fi­dence with cau­tion in tes­ti­mony

The Pak Banker - - FRONT PAGE -

When the Fed­eral Re­serve chair ad­dresses law­mak­ers this week in Wash­ing­ton, she will have to strike a bal­ance be­tween sound­ing con­fi­dent on the do­mes­tic econ­omy and ac­knowl­edg­ing in­creased risks from abroad. Two weeks af­ter of­fi­cials sig­naled in­ter­est rates may rise more slowly than pre­vi­ously ex­pected, econ­o­mists and in­vestors will be try­ing to gauge Yellen's will­ing­ness to de­lay tight­en­ing at the March meet­ing.

With fi­nan­cial mar­ket-tur­moil caus­ing un­cer­tainty about the out­look, en­ergy prices damp­ing in­fla­tion and the Euro­pean Cen­tral Bank pre­par­ing a stim­u­lus boost that may bol­ster the dol­lar, the mar­ket-im­plied prob­a­bil­ity for a rate in­crease next month has dropped to 10 per­cent from more than 50 per­cent at the start of the year. Pol­icy mak­ers in­clud­ing Vice Chair­man Stan­ley Fis­cher have cau­tioned that it's still too soon to de­cide the next step.

"I don't think we should ex­pect Yellen to throw the towel on a March hike," said Thomas Costerg, a se­nior U.S. econ­o­mist at Stan­dard Char­tered Bank in New York. "She may em­pha­size the pos­i­tives in the U.S. econ­omy, par­tic­u­larly the still-strong la­bor mar­ket. Look­ing ahead, she may sound more cau­tious, and she will likely high­light that the neg­a­tives are mostly from abroad and that they are watch­ing the global pic­ture closely."

Yellen is sched­uled to ap­pear be­fore the House Fi­nan­cial Ser­vices Com­mit­tee at 10 a.m. Wed­nes­day and will ad­dress the Se­nate Bank­ing Com­mit­tee the next day. She'll have ev­i­dence to sup­port the Fed's view that the U.S. la­bor mar­ket re­mains solid and wages are show­ing signs of pick­ing up.

Of­fi­cials have soft­ened their stance since the Fed raised in­ter­est rates in De­cem­ber for the first time in al­most a decade and re­leased fore­casts show­ing that the me­dian of of­fi­cials' es­ti­mates ex­pected pol­icy tight­en­ing of 1 per­cent­age point in 2016, prob­a­bly spread over four quar­ter-point hikes.

U.S. eco­nomic growth slowed in the fourth quar­ter as busi­nesses cut back in­vest­ment, rais­ing con­cern that weak­en­ing global trade will damp or even in­ter­rupt one of the long­est pe­ri­ods of con­tin­u­ous ex­pan­sion since World War II. Oil prices are close to the low­est level since 2003.

At the heart of the con­cern about the world econ­omy is China, where pol­icy mak­ers are bat­tling the slow­est growth in 25 years, the de­pre­ci­a­tion in the yuan to the low­est value in five years and an equity sell-off that shook global mar­kets, tight­en­ing fi­nan­cial con­di­tions from the U.S. to Europe. The Stan­dard & Poor's 500 In­dex is down 8 per­cent this year, while the Stoxx Europe 600 In­dex has lost 11 per­cent. "Yellen will ac­knowl­edge that the tight­en­ing in fi­nan­cial con­di­tions since the De­cem­ber meet­ing could have a neg­a­tive im­pact on the growth and in­fla­tion out­look," said Steven Fried­man, se­nior in­vest­ment strate­gist at BNP Paribas In­vest­ment Part­ners in New York. "But so long as she con­tin­ues to sig­nal a bias to raise rates, her com­ments are un­likely to lead to a mean­ing­ful im­prove­ment in mar­ket sen­ti­ment."

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