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Instant View: Yellen - Economy healthy enough for gradual rate rises
July 12, 2017 / 1:16 PM / 3 months ago

Instant View: Yellen - Economy healthy enough for gradual rate rises

(Reuters) - The United States is healthy enough to absorb further gradual rate increases and the slow wind down of the massive bond portfolio accumulated by the Federal Reserve during the financial crisis, Fed Chair Janet Yellen said in prepared testimony to be delivered to Congress Wednesday morning.

KEY POINTS:

* Yellen: Interest rates are rising, and “would not have to rise all that much further” to reach what the Fed considers a neutral rate

COMMENTS:

RICHARD SCALONE, CO-HEAD OF FOREIGN EXCHANGE, TJM BROKERAGE, CHICAGO

“It was a little bit more dovish than most had thought. She said rates won’t have to rise much further to get to neutral, I thought that was key. She said inflation response to economy is a key uncertainty, alluding to the inflation again, part of the dovishness. She said inflation running below goal, has declined recently, that’s certainly not a hawkish statement. So I think if you put everything together on an overall basis it was somewhat dovish.”

“At the end of the day, the emphasis on inflation and the fact that it’s not moving in the desired direction is why I think people would look at this as more dovish than hawkish.”

“The ‘additional gradual rate hikes needed,’ which was theoretically hawkish, was exactly what everyone knows, based on the dots and the rhetoric that we’ve seen, so I don’t think that was new news, I don’t even think that was slightly new news, I think that that’s why it was ignored.”

“It’s hard for me to look at this as anything but dovish. I think the kneejerk reaction higher in the dollar was the additional gradual hikes needed, but again on second reading of the same statement, I don’t think that’s really anything new or surprising. She talked about employment gains early in the testimony, which led to a little bit of a kneejerk strong dollar reaction, but net net the dollar weakening post the release of the prepared comments I think is logical.”

“I would say if there were 10 headline comments, the fact that three or four of them were geared towards inflation, I think again emphasizes the point that they’re not thrilled with the current level of inflation and the direction that it seems to be heading in.”

“The fact that U.S. interest rates are lower as a derivative of this speech, that’s much better for EM and commonwealth currencies, so the peso, the South African rand, Turkish lira, Russian ruble, are probably the best performers on the day, and right behind them is the Aussie and the kiwi, so higher yielders globally are really doing well and enjoying the fact that the U.S. doesn’t look like it’s going to prick the bubble anytime soon.”

JIM VOGEL, INTEREST RATE STRATEGIST, FTN FINANCIAL, MEMPHIS, TENNESSEE

“The emphasis on inflation uncertainty has been in Fed discussions for a bit, that she put it into her prepared remarks elevates it for the market. The inflation theme that ruled June got totally overruled by European Central Bank thinking, but the inflation facts never really went away. If nothing else Yellen’s comments remind people that inflation has yet to play out precisely as the Fed has forecasted. Given the expectation that almost every major central banker was leaning towards hawkish, the prepared remarks don’t sound particularly hawkish. This raises the stakes for Friday’s CPI number. It’s surprised to the downside for three months, by a lot on a cumulative basis, so people are going to be very anxious to see if that was just a statistical glitch or something that was short lived, or if it’s going to continue for a couple more months.”

PAUL NOLTE, PORTFOLIO MANAGER AT KINGSVIEW ASSET MANAGEMENT IN CHICAGO

    “It’s surprising to see the markets race like they did. I‘m not very surprised by Yellen’s comments. She’s been pretty steadfast that we’re raising rates. The market is liking the fact that she’s seeing economic growth.”

“What the Fed’s doing and she’s doing is continuing the case for raising rates. The history of the Fed no matter who’s been governor is that they’ll raise rates until the economy breaks. Not one has raised rates and said OK we’re done. It always leads to a recession. I think it’s a fallacy that they have to raise rates so they can cut them in a recession.”

MARKET REACTION:

STOCKS: Stock futures added to gains

BONDS: Most U.S. Treasury yields fall

FOREX: The U.S. dollar ticks lower against the euro EUR= and yen JPY=

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