Federal Reserve vice chairwoman Janet Yellen has been nominated by President Obama to succeed Fed chairman Ben Bernanke when his term expires in January.
Tomorrow at 10 AM ET, the Senate Banking Committee holds a confirmation hearing, and it will mark the first time since April that Yellen has spoken publicly about monetary policy.
The full text of Yellen’s prepared remarks was released this afternoon.
Gold and Treasuries rose when her comments hit the tape, suggesting they were slightly more dovish than market participants had expected.
Of course, everyone wants to know when the Fed will announce the initial tapering of its $US85-billion-a-month quantitative easing program. Last week, the consensus was that tapering would not be announced before the March FOMC meeting, but a strong October jobs report released Friday by the BLS has Fed-watchers believing the probability of a tapering announcement in December or January has gone up, and Treasuries have sold off as a result.
“A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases,” said Yellen in her prepared remarks.
“The ‘ultimately’ can be read as saying ‘not immediately’ and that is what the market is jumping on,” says Steven Englander, global head of G-10 FX strategy at Citi. “Right now the market is fixated on the tapering schedule and anything that implies slightly slower timing is slightly dovish. However, there is nothing in the comment that is so committal that she could not back off. For example, if she says tomorrow in Q+A that tapering is not tightening we would probably see yields back up and the USD strengthen.”
So, what should observers expect Thursday?
On one hand, most agree that Yellen will not try to “break any new ground” with respect to monetary policy in her confirmation hearing tomorrow.
On the other hand, many also acknowledge the potential for market volatility arising from the event.
Why? Yellen is known as a policy dove (an advocate for aggressive stimulus in an environment of high unemployment and low inflation), so, on balance, anything less than a “dovish” take from Yellen Thursday could go against expectations.
“The goal of the nominee would be to keep enough centrist Republicans in a supportive position to overcome any possibility of a filibuster,” write BofA Merrill Lynch interest rate strategist Priya Misra and Shyam Rajan in a note to clients. “At the margin, the market may be disappointed given that expectations are likely skewed dovish from her prior speeches.”
Citi’s Englander provides a quick cheat sheet for what to watch for in the market’s reaction to Yellen’s testimony in a note:
As a shorthand, the U.S. dollar will strengthen in both G-10 and emerging markets if 10-year and 2-year [Treasury] yields rise, irrespective of what the equity market does. This is true of both EM and G-10, probably because this is viewed as signaling tighter money, irrespective of whether equities like it or not.
If yields are down, EM and G-10 are far more likely to rally if equities are rallying — presumably this looks like a risk-positive yield drop — so this would be a dovish Yellen surprise.
If equities are down and yields are down, it is more negative for the USD in G-10, but remains positive for USD vs. EM. The interpretation is that this is probably risk-negative, ok for low-beta G-10 to rally against USD, but damaging to high-beta EM.
The hearing starts at 10 AM ET and goes until noon. Follow the whole thing LIVE on Business Insider »
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