Yellen gave some food for USD bulls – June hike

Yellen gave some food for USD bulls – June hike

The second part of Fed Chair Yellen’s testimony focused on regulatory questions, but there was an interesting monetary policy comment: Yellen sees  inflation as falling lower before rising higher.

This has implications on the rate hike. Here’s why.

This comment reflects confidence that the  fall in oil prices will only have a temporary effect on wider prices.  More importantly, this means that the next Fed decision does not depend much on the lower  inflation levels.

The Federal Reserve has two mandates: inflation and employment. If the Fed is not worried to much about inflation, it is  probably more  focused on jobs, and this was evident in the focus on the labor market in the prepared statement.

She also went to explain what a removal of forward guidance means. No, it does not mean an imminent rate hike, and this hurt the US dollar. But, there’s another way of seeing it: she is preparing markets for a removal of guidance in the upcoming meeting in March.

But as we explained earlier, this depends a lot  jobs.

The recent jobs report was absolutely brilliant: 257K more jobs, 147K in revisions and a bounce in wages. The US experienced the best 3 months of job gains since the 90s. So, it’s not a one off, but  will it continue?

If we have another strong report on March 6th, a removal of forward guidance is likely on March 18th.

And this could mean  a  first move in the rates in June, the next decision that is accompanied by a press conference, even if the Fed insists that every meeting is a live meeting, and a press conference is not a must for a change of policy.

A rate move could be symbolic: instead of 0-0.25% it could be 0.25% exactly, yet this would signal an end to extreme easing and a beginning of tightening cycle, even if it is a slow and not far reaching one.

What do you think?

More:  3 reasons why EUR/USD cannot really recover

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.