USD and yields drops on Fed Monetary Policy Statement
The opening statement by Yellen has been released on the Fed website.
US 10yr yields have fallen 5bp, 2yr swap rates are down 3bp.
The parts on inflation appear to suggest that the Fed may be wavering a bit on its plans to keep tightening policy.
She says the forecasts are for inflation to rise, and warrant gradual increases in the fed funds rate, but she singles out the low inflation outcomes as a factor that may impact the course of policy.
In the section on monetary policy she said:
“As I noted earlier, the economic outlook is always subject to considerable uncertainty, and monetary policy is not on a preset course. FOMC participants will adjust their assessments of the appropriate path for the federal funds rate in response to changes to their economic outlooks and to their judgments of the associated risks as informed by incoming data. In this regard, as we noted in the FOMC statement last month, inflation continues to run below our 2 percent objective and has declined recently; the Committee will be monitoring inflation developments closely in the months ahead.”
In the section on discussing the economic outlook share said:
“With regard to inflation, overall consumer prices, as measured by the price index for personal consumption expenditures, increased 1.4 percent over the 12 months ending in May, up from about 1 percent a year ago but a little lower than earlier this year. Core inflation, which excludes energy and food prices, has also edged down in recent months and was 1.4 percent in May, a couple of tenths below the year-earlier reading. It appears that the recent lower readings on inflation are partly the result of a few unusual reductions in certain categories of prices; these reductions will hold 12-month inflation down until they drop out of the calculation. Nevertheless, with inflation continuing to run below the Committee’s 2 percent longer-run objective, the FOMC indicated in its June statement that it intends to carefully monitor actual and expected progress toward our symmetric inflation goal.”
Of course, the Fed did say in its June FOMC statement that it was watching inflation, and the minutes did indicate a split in member views on how policy might respond to low inflation. The market tended to ignore the minutes because, at the time, bond yields globally were rising. Fed Chair Yellen tended to downplay the low inflation outcomes at her JuneFOMC meeting press conference, and the market focussed on that at the time.
The Testimony today again highlights special factors that held down inflation that are seen as temporary, but gave more weight to concerns that it needs watching after it fell in recent months.
It appears, like much of the last year, positioning has caused a significant response to a nuanced shift in the commentary.
It is also interesting to note that the EUR rose initially on the Yellen statement, but then fell more, suggesting that the market is long EUR and it is tending to correct, even though net net the Yellen testimony is otherwise negative for the USD
GBP is also not performing very well in light of the stronger than expected labour market data, but dragged down by the surprising soft EUR performance post-Yellen statement.
We have stopped out of the GBP short. There is a good change the EUR/NZD stop is triggerd (in profit) given the corrective price action in EUR and lower US yields lifting the NZD.