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Talking Points:

  • FOMC members Janet Yellen, William Dudley, and Stanley Fischer present speeches
  • According to Yellen, FOMC thought it could be appropriate to move in December
  • The US Dollar rallied as 2 year treasury yields reflect Fed rate hike speculation

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The Dow Jones FXCM US Dollar rallied after Federal Reserve’s Chair Janet Yellen testified at Capitol Hill. The main takeaway from her speech is that she said members of the FOMC, which vote when it comes time for interest rate decisions, think it could be appropriate to move in December depending on data. Following her speech, 2 year treasury yields climbed more than 4 percent signaling that the markets are becoming more certain of a rate hike by the end of the year.

As for Yellen’s outlook on the US economy, she said it is performing well. Labor slack diminished significantly while the pace of job gains has slowed recently. Employment is going up while incomes are rising. The Fed sees the economy on a steady path of improvement. Janet Yellen expects the economy to justify a gradual tightening and that the markets should focus on the entire rate path over time. Interestingly, she said that the central bank might weigh negative rates to encourage bank lending if the outlook worsens.

Later that day, New York Fed President William Dudley presented a speech. He did not comment on the US economic outlook or monetary policy however, he completely agreed with Janet Yellen’s view on a “live” December meeting. Williams showed a growing concern about the decline in inflation expectations. Here are further highlights from his speech:

  • Job market has more slack than unemployment rate suggests
  • Fed probably wants to see a bit more of wage inflation
  • Wage inflation has to be supported by productivity gain
  • Sees a lot of examples of shortages of skilled labor

Moving on, FOMC Vice Chairman Stanley Fischer spoke to the National Economists Club. Like Dudley, Fischer did not comment on the outlook of the US economy or monetary policy. The board member did however say that the Federal Reserve is not that far from its 2 percent inflation target. He added that US inflation is ‘not as low as you think’. Here are further highlights from his speech:

  • Most leading economies facing ‘too low’ inflation
  • Central banks should have freedom to pursue mandates
  • Fed’s monetary policy is already very transparent
  • Not much evidence inflation measure is too low
  • productivity growth been very low lately
  • believes wage growth will come back

Out of all the speeches, Janet Yellen’s appeared to take the spotlight. Federal funds futures jumped to a 58 percent probability of an interest rate adjustment in December during her testimony. Yellen’s insistence on the data dependency of policy underscores the importance of key economic data releases in the days ahead, particularly Friday’s NFPs.

US Dollar Rises as Yellen's Testimony Increases Fed Rate Hike Bets

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