Bank of the West Instant Analysis for February 10, 2016

  • News
  • by BPC Staff
  • on February 10, 2016

Instant Analysis: Chair Yellen’s Semi-Annual Humphrey-Hawkins Testimony to Congress

Key Insights From Chair Yellen’s Testimony Before Congress Today

Chair Yellen kept her options open on rate hikes this year.  No additional information on timing or number of Fed interest rate hikes this year.  However, there was plenty of reference to global growth risks and deteriorating financial conditions that if it continues could damage the U.S. growth outlook and slow the pace to future rate hikes. The headwinds from a stronger US dollar was also mentioned.  However, Chair Yellen’s statements were probably not dovish enough in the stock market’s view.  The markets are looking for total capitulation on further rate hikes this year.

The Federal Reserve is looking at a broad range of indicators to make their interest rate hike determinations, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Federal Reserve continues to expect gradual rate hikes this year, and a return to 2.0% inflation over the medium-term.  This is still at odds with the Fed Funds futures market expectations,  which is currently pricing in only a 35.7% probability of another Fed rate hike this year.   Though that is higher than yesterday’s 29.9% probability of another rate hike by the December FOMC meeting.

Bottom line,  the Fed is not yet ready to back away from the course they set back in December.  However, they acknowledge that the downside risks to global growth  and the deterioration in financial conditions could hurt the U.S. growth outlook if they persist.  If U.S. growth disappoints, a lower path of the Fed funds rate would be appropriate.  I think this probably takes a March rate hike from the Fed off the table.  The earliest the Fed would likely hike again, in my opinion, is at the June FOMC meeting which happens to include a Yellen press conference and update on the FOMC’s economic and interest rate forecasts.  My baseline forecast for the Fed is now for only 2  quarter point rate hikes this year.  The next one at the June FOMC meeting and the second in December after the Presidential election.

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