This Is What It Looks like When Doves Fly

Gary Wagner  

Thursday July 13, 2017 18:05

It is that time of year, when the Federal Reserve’s Chairwoman Janet Yellen provides testimony to both the Congress and Senate. This semiannual monetary policy report began yesterday with testimony given to the congressional financial services committee. It was followed by testimony today before the Senate Banking Committee.

Today’s hearing was composed of the same prepared remarks Janet Yellen gave to the house financial services committee yesterday, in which she reaffirmed the Central Bank’s policy to continue its process of normalizing interest rates. She said that the Fed continues to foresee the implementation of gradual interest rate hikes in the coming years. In her testimony, she also mentioned that the Federal Reserve is likely to start shrinking its $4.5 trillion portfolio “relatively soon” this year.

On both counts (interest rate hikes and balance sheet liquidation) it appears Chairwoman Yellen had a much softer, more dovish word track than in previous statements. As far as balance sheet liquidation goes, absent from her testimony were any specifics on target dates to initiate asset liquidation from their portfolio. Before this testimony, released Fed minutes conveyed that their asset liquidation program could begin as early as September.

During her testimony, Janet Yellen was asked why the central banks remain committed to normalizing policy, even as price and wage pressures remain subdued. Her answer again confirmed that current Federal Reserve policies are not etched in stone and as always will continue to be data dependent.

"Monetary policy is not on a pre-set course…We're watching it very closely and stand ready to adjust our policy if it appears that the inflation undershoot will be persistent."

This comment was an agreement Tuesday’s comments made by Lael Brainard, a member of the US Federal Reserve’s Board of Governors, who said that the Federal Reserve likely will act “soon” to begin running off its $4.5 trillion bond portfolio if the economy cooperates. However, her statements about future interest rate hikes contained a much more dovish tone saying that “the Fed may not have much more to do in terms of interest rate hikes.”

After nine years of interest rates that were close to zero, the Federal Reserve has begun to raise interest rates gradually. Currently, its benchmark funds rate is at 1 to 1¼ percent. According to the CME’s FedWatch, tool market participants believe there is about a 52% chance that there will be another interest rate hike this year.

While earlier statements from past FOMC meetings revealed a more hawkish tone in regard to Federal Reserve policies than previously believed, comments made by Chairwoman Yellen over the last two days seem to have softened the hawkish word track and replaced it with a softer more dovish tone.

As such, we have seen U.S. equities and precious metals pricing reacting favorably, at least for the first part of the week. Today, however, this softening of policy seems to have favored risk on investments sector and, as a net result, put fractional pressure on both gold and silver pricing.