Finding balance key for Yellen
JANET Yellen is preparing to walk a tightrope.
When the Federal Reserve chair addresses legislators 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 signalled 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 2 percent from more than 50 percent at the start of the year.
Policymakers including vice-chairman Stanley Fischer have cautioned that it is 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 US economist at Standard Chartered Bank in New York.
“She may emphasise the positives in the US economy, particularly the still strong CENTRAL banks are running into diminishing returns from their use of easy monetary policies, seven years after first championing quantitative easing to save the world from depression.
The new reality is clear across global financial markets: The Standard & Poor’s 500 Index fell on Monday to a 22-month low as bank shares dropped to their weakest since 2013. Japan’s benchmark equity index careened yesterday towards levels unseen since 2014 and the yield on the country’s 10-year bonds dipped below zero for the first time.
Stocks are also falling in Europe. All that despite the Bank of Japan’s surprise shift to negative interest rates, the European Central Bank’s signal it will deploy new stimulus next month and speculation labour 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 today and will address the Senate banking committee tomorrow. She will have evidence to support the Fed’s view that the US labour market remains solid and the Federal Reserve will slow its campaign to raise interest rates. Underscoring the lack of policy potency is that the yen and euro are both climbing even as policy eases.
“The markets are wondering, well, we’ve had these non-conventional monetary policy experiments for the last six or seven years and they haven’t caused a sustainable boost to global growth, so what will the latest moves do,” said Shane Oliver, the head of investment strategy at Sydney-based AMP Capital Investors.
The shifts may strengthen the argument of opponents to the “whatever it takes” approach by central banks to stoke inflation expectations, appetites for risk and, ultimately, economic growth. – Bloomberg 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 this year, probably spread over four quarter-point hikes.
US 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 2. Oil prices are close to the lowest level since 2003.
At the heart of the concern about the world economy is China, where policymakers are battling the slowest growth in 25 years, the depreciation in the yuan to the lowest in five years and an equity sell-off that shook global markets, tightening financial conditions from the US to Europe.
The Standard & Poor’s 500 index is down almost 10 percent this year, while the Stoxx Europe 600 index has lost about 14 percent.
Testimonies
“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, a 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.”
Lindsey Piegza, the chief economist at Stifel Nicolaus, said Yellen would use her congressional testimonies to defend the December lift-off and keep options open for next month. – Bloomberg