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YellenÕ testimony shows dovish approach toward federal funds rate

Dow hits new high in reaction to remarks

Federal Reserve Chair Janet Yellen testified Wednesday before the House Financial Services Committee in her semi-annual monetary policy report.

Yellen did not make any indication toward the looming rate hike, but her statements were somewhat dovish, and even sent bond markets soaring after hearing her comments. The Dow Jones industrial average jumped 166 points, hitting a record intraday high after her comments were released.

“That expectation is based on our view that the federal funds rate remains somewhat below its neutral level, that is, the level of the federal funds rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel,” Yellen said in her prepared remarks. “Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance.”

Yellen’s view of the overall economy was positive as she pointed out the moderate growth rate during the first half of the year and the rebound in the second quarter.

“Meanwhile, the economy appears to have grown at a moderate pace, on average, so far this year,” Yellen said. “Although inflation-adjusted gross domestic product is currently estimated to have increased at an annual rate of only 1.5% in the first quarter, more-recent indicators suggest that growth rebounded in the second quarter.”

One economist explained why Yellen’s remarks were more dovish, but explained why he still expects a rate hike in September.

“We still think that the unemployment rate will fall toward 4% over the next couple of months, persuading the Fed to hike rates again in September,” Capital Economics Chief Economist Paul Ashworth said. “It is also possible that the Republicans will be close to announcing a joint plan for fiscal stimulus by that time.”

“Nevertheless, there is no guarantee that core inflation will rebound in the short-term and the mid-September FOMC meeting could occur against a backdrop of another potentially disruptive stand-off over raising the debt ceiling,” Ashworth said. “Those uncertainties help to explain why Yellen is being fairly guarded today about the Fed’s next moves.”

During the hearing, one senator asked Yellen about the timing of a balance sheet normalization, explaining that inflation continues to miss the 2% target set by the Fed.

Yellen explained that the committee will continue to watch the inflation rate and take it into consideration in its decision to raise rates, however “If the economy continues to evolve in accordance to our expectations, we agree it is something we should begin this year.”

In her opening statement, Ranking Member Maxine Waters, D-Calif., commended Yellen, but asked that she consider “troubling economic disparities” in future monetary policy decisions.

“Since your last testimony before this Committee, wage growth continues to lag, and troubling economic disparities continue to exist along racial and ethnic lines,” Waters said. “I hope Fed policymakers will keep these trends in mind, and the fact that inflation expectations have fallen, as they evaluate the stance of monetary policy.”

“Chair Yellen, I commend you for your steady leadership, and look forward to your testimony,” she said.

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