Brian Jacobsen

Fed’s semiannual Monetary Policy Report: Yellen plays the cards close to her chest

AdvantageVoice® Blog—2-11-14
Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

Chair Yellen delivered her first semiannual monetary policy testimony before the House of Representatives’ Committee on Financial Services today. The testimony was released before she actually read it to the committee members. This is the same testimony she will deliver again on Thursday before the Senate. Some people still refer to this semiannual testimony as the Humphrey-Hawkins Report, after the two congressmen who sponsored the bill in 1978, creating this twice-a-year show.

In May, it wasn’t Chairman Bernanke’s prepared testimony that sent yields higher and equity markets lower. Instead, it was his response to a question posed to him by a committee member. Chair Yellen was more circumspect with her answers. Watching her testimony reminded me of the times when I was a child watching Prime Minister’s Questions on C-SPAN, and the prime minister would often say, “I refer the honourable gentleman to the answer I gave some moments ago.” She answered the questions without divulging anything new.

In the prepared testimony, she started off by tipping her hat to former Chairman Bernanke, pledging to continue the tradition he started of making the Federal Reserve (Fed) more transparent and accountable. In my opinion, one way the Fed could do this is by having a press conference after every Federal Open Market Committee meeting instead of after every other meeting, as is the current policy.

According to the prepared testimony, the Fed views the economy as having gained traction in the second half of 2013. Since August 2012, just before the latest round of asset purchases began, the economy has expanded payrolls by 3.25 million jobs, and the unemployment rate has dropped more than a percentage point and a half. The chair clarified that the unemployment rate is an unreliable indicator of the health of the labor market, calling out the fraction of the unemployed who have been without work for six months or more and the number of people who are working part-time but want full-time employment. These will be two key metrics to follow in determining when the Fed may raise rates.

I think it is notable that she used the word “years” to describe how long it could take for the economy to hit the Fed’s targets for growth and inflation.  I may be reading too much into it, but she could be trying to enhance the Fed’s forward guidance (that is, when the Fed may raise rates) by indicating that rates could stay exceptionally low well into 2016.

Despite the Fed’s lack of action at its last meeting, Chair Yellen did acknowledge that the Fed is monitoring global financial conditions and will act if the conditions pose a risk to the U.S. economic outlook. The Fed is likely to rely more heavily on its forward guidance than asset purchases to affect long-term interest rates, relying on modulating the pace of purchases only if job gains continue to stay below 200,000 and inflation begins to trend lower.

The views expressed are as of 2-11-14 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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