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Round Up – Yellen’s First Testimony as Fed Chair

James Boston
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The new US Federal Reserve chair, Janet Yellen, is to give her first testimony to Congress later today. This is a big event for the markets, which will be on the look out for three key elements. Will Yellen confirm that she is to continue the policies of her predecessor, what is her stance on interest rates and what are her plans for the Tapering programme.

Although it is widely anticipated that she will adapt a ‘business as usual’ approach, the primary risk factor here for the markets is that she takes the opportunity to signal her intention to put her own stamp on the Fed.

Yellen is however largely expected to re-confirm a ‘hands on’ approach by the Federal Reserve, the interpretation of this is that interest rates are to be held near zero for the foreseeable future. This more than likely rules out any monetary tightening for the remainder of 2014 and pricing of all US asset classes is currently reflecting this, the Dollar is at its cheapest level since mid-January while Gold has reached its highest point in 3 months.

Apart from the usual questioning on the state of the Labour and Housing markets, it is likely that much of today’s hearing by the Congressional Financial Services Committee will focus on the intended future pace of the Tapering program.

Markets have up until now attributed the Feds scaling back of its bond purchase program as monetary tightening. In a sense this is true, the Federal Reserve is injecting less cash into the economy each month, in reality however it is ‘tapering’ back its bond buying in response to an increase in the velocity of the money supply, thereby simply maintaining the status quo.

The Fed chair has an opportunity today to clarify this and it will benefit the markets if she can clearly and convincingly disassociate the Feds unwinding of its synthetic support actions from the actual fundamentals of the economic recovery.

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