A central banker dead-batting lawmakers questions ? Perhaps not entirely on this occasion ......

A central banker dead-batting lawmakers questions ? Perhaps not entirely on this occasion ......

ref :- "Yellen Says Fed Will Consider Raising Rates at Coming Meetings" , Wall Street Journal, Markets

As a rule, central bankers are not the type to engender much public sympathy but perhaps we're getting soft. We do feel for them a bit when they have to appear before congressional / parliamentary / departmental committees to answer questions from lawmakers who's chief objective is often to boost their own profile. Quite simply, because the markets hang on every word of these testimonials most of the time they are understandably non-committal and bland, evasive even. An exercise in the art of saying nothing. 

Chairwoman of the US Federal Reserve Janet Yellen testified before the Senate Banking Committee yesterday, and today goes in front of the House Financial Services Committee. Undeniably there's a little extra spice to these occasions right now, given the Trump administration's low opinion of Fed policy in recent years and their radical, reflationary fiscal plans that we can only guess at for the time being. Fortunately, she's now an old hand at knocking back insistent questioning without giving any unintended leads to markets but yesterday she did seem to strike a slightly more hawkish note than was expected, and it's highly unlikely that it was unintended.

Ms Yellen certainly didn't say that a hike in March was likely (and according to Fed Funds futures markets, it isn't) , but then again in not ruling it out her remarks were her first to open the door to that possibility. She spoke of a hike being appropriate "at our upcoming meetings", assuming there were no setbacks on the employment front or in the course of continued rising inflation. ***

In a generally upbeat assessment of the current situation, Ms Yellen warned that there was a danger in holding off too long in raising rates as it might mean that the Fed would have to hike more aggressively if there was an unwanted spike in inflation. This contrasts pretty starkly with the position of some at the Fed only recently (including the Chairwoman) who were hinting that a little overheating of the economy might be tolerated rather than running the risk of stifling growth with premature rate rises. 

So even if a March hike remains odds-against, and the market considers two rises this year more likely than the three the Fed think are in store, it's not a surprise that on balance the market took Ms Yellen's testimony to be mildly hawkish and supportive of the Trumpflation trades  --  cue  :  equities up, dollar up, bond yields up (and prices down).

In many ways the most interesting discussions on offer were not directly concerned with the chances of an imminent rate hike. Ms Yellen was asked about the size of the Fed's balance sheet  --  or in other words, the disturbing amount of bonds and other assets that it now holds as a result of Quantitative Easing programmes instigated as a result of the financial crisis. Before the crisis, the balance sheet was less than $1 trillion. Now it stands at about $4.5 trillion. At some stage it will have to be reduced, but currently the Fed maintains its level by reinvesting the proceeds of maturing bonds.

The Fed is still in discussions as to the best method and timing of reducing the balance sheet (by allowing assets to mature and NOT reinvesting the capital), but is cautious about committing to any plan at this time. In answer to the question as to whether shrinking the size of the balance sheet might be an effective way to tighten monetary policy  --  as opposed to raising rates  -- Ms Yellen dismissed the idea by saying that rate moves were a more familiar, more predictable and better understood method of conducting monetary policy. That would be a "No", then.

Of Mr Trump's eagerly awaited fiscal plans ( The Tax Proposal ? "Phenomenal !" , and Coming Soon !) and their effect on the Fed's future policy , Ms Yellen did swerve that one :  "Fed officials don't want to base current policy on speculation about what might come down the line". She did have time however to slip in a gentle nudge to the new new administration about not expanding budget deficits irresponsibly. It is not clear whether Mr Trump, as we say no fan of Janet Yellen , will take such advice with the same generosity of spirit with which it was no doubt offered.

Mind you, the President may have other things on his mind for a while ..... Russian things, and brawls with his own intelligence services. We hope James Comey, Director of the FBI, has got his tin hat on.

*** As we write, US Jan inflation (Consumer Price Index) data released, strongest since early 2013 and if there was any doubt about whether Janet Yellen was sounding a touch hawkish, these numbers DEFINITELY are. Strong retail sales, too. Dollar up, bond prices slumping.