Société Générale on Federal Reserve Chair Yellen's semi-annual testimony and Q&A session, characterising the market's dovish interpretation
SG say Yellen's remarks are in line with her prior comments
- The market homed in on the discussion around the neutral rate and the view that the Fed might not have to raise rates much further from here to achieve a "neutral policy stance"
- This comes on the heels of recent comments by Fed Governor Lael Brainard, who cast doubt over the need to continue to remove accommodation...
- The market is now pricing in less than a 50% probability of rate hike at the December meeting ... 2y Treasury spreads to interest on excess reserves (IOER) is back near their lows ... Risky asset rallied as the markets cheered the possibility of a more accommodative stance by the Fed
But, says SG:
- While Fed Chair Yellen acknowledged that the neutral rate is likely to remain low by historical standards, she seemed optimistic that "the factors that are currently holding down the neutral rate will diminish somewhat over time, additional gradual rate hikes are likely to be appropriate over the next few years", which the market chose to ignore.
- She also sounded more upbeat on the outlook for inflation, referring to recent weak prints as "few unusual reductions in certain categories of prices", thereby deemphasising the yoy core PCE, which is likely to remain low until next year, when the decline in wireless services in March and prescription drugs in April rolls out of the yoy calculation.
- When questioned on balance sheet normalisation Yellen said that the Fed would start unwinding the balance sheet "relatively soon". While she did not go into specifics on the optimal balance sheet size over the long run, she said that she expects it to shrink to a more normal size around 2022.
Bolding above is mine.
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I don't know what Victor was thinking here :-D
