Janet Yellen Keeps March Rate Hike in Play

Federal Reserve Chair Janet Yellen finished up speaking in Washington, D.C. today. Starting on Tuesday, she appeared before congress for her semiannual testimony on monetary policy.

Day 1 was before the Senate banking Committee, and Day 2 was before the House Financial Services Committee.

Click here to get today’s latest mortgage rates (Feb. 15, 2017).

Whenever the Fed Chair makes public statements, financial market participants keenly watch for any forward guidance. This time around, her testimony was under particular scrutiny as hope for three rate hikes hung in the balance after the Fed’s cautious tone at their February meeting.

Yesterday: Yellen Keeps March in Play

Senate Banking Committee

Janet Yellen began the day by reading her prepared statement. Most of the statement was a fluffy recap of events, since Yellen last testified in June, however, toward the end is where the Fed Chair began to get into monetary policy:

“As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. Incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the Committee’s expectations. At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”

This was without a doubt the biggest moment of the prepared remarks, and was the closest that Yellen would get to stating that the March meeting is firmly on the table. The phrase stating it would be “unwise” to wait too long to raise the federal funds rate immediately got picked up on by reporters and investors alike, and it was taken to mean that March is still a contender for a rate hike.

Today: No Further Rate Hike Discussion

House Financial Services Committee

Janet Yellen made clear where she currently stands on monetary policy yesterday, so today’s events weren’t being watched with the same amount as fervor as yesterday’s. Instead of needling questions from lawmakers about the timing of the next rate hike, the day mostly consisted of house Republicans claiming that the U.S. economy is not in great shape and house Democrats and Janet Yellen arguing that it is. It was a back and forth debate that was at times more impassioned than yesterday’s testimony.

Market Response

The markets responded on Tuesday with an instant surge in Treasury yields, as investors moved out of safer investments and into riskier assets like stocks. The yield on the U.S. 10-year Treasury note shot up 4.5 basis points to about 2.48%. It came down a few points before the day’s close. However, this morning’s inflation data sent stocks and Treasury yields higher again, and nothing in Janet Yellen’s testimony really had an effect on things.

Click here to get today’s latest mortgage rates (Feb. 15, 2017).

The Fed Fund futures, which reflects the market’s views on when the next rate hike will take place, did show a rise in optimism for March after Yellen’s comments. It’s currently showing a 26.6% chance of a rate hike. That’s up from Tuesday’s reading of 17.7%. After the Fed’s February FOMC statement was released, the probability had been as low as 8%. Of course, a 26.6% is a far cry from a sure thing. Unless the economy really starts to pick up, it seems that March will get a pass.

Bottom Line

Janet Yellen made it clear to the markets that if inflation and labor data points to a strong U.S. economy, the Fed will have to seriously consider raising the federal funds rate. However, as it currently stands financial market participants don’t think that will happen in March.

from Total Mortgage Underwritings Blog http://ift.tt/2lQjAPm