Yellen Testifies to Congress, Signals Policy Normalization May Be Looming

During her testimony in front of Congress last week, Federal Reserve Chair Janet Yellen provided an upbeat assessment of a U.S. economy that has added one million new jobs since November. Yellen signaled that the “patient” language would be dropped from the statement following the Fed’s next meeting in March, but quickly qualified that this does not guarantee a June liftoff for interest rates. However, it was Yellen’s comments regarding a labor market that hasn’t entirely healed and inflation that remains too low that the market took to heart. Two-year Treasury rates fell to 0.55% inter-day, indicating traders’ shifting views, in particular their increasing doubt that the Fed will raise interest rates in the first half of the year. The current economic climate presents a formidable challenge for the Federal Reserve. By many accounts, the U.S. economy is ready for tighter monetary policy, but global concerns and low long-term expectations for domestic growth and inflation have caused the market to diverge from what should be a very defensive positioning. The March Federal Reserve meeting is shaping up to be an important one, with all eyes on Chair Yellen in anticipation of a change in policy language. In the meantime, we’ll remain “patient,” ready to take advantage of the next attractive opportunity in the market.

Sources: FT, Reuters, Bloomberg