On July 12, the chair of the US Federal Reserve, Janet Yellen, testified before a special committee on monetary policy in the US Congress. According to the Fed chair, the federal funds rate is close to the neutral level.
Yellen’s Speech: Labor Market Shows Good Results
The normal level of interest rates is held back by temporary factors, so for some time it will remain lower than in previous decades.
Yellen noted strong results in the labor market. According to her assessment, the growth of jobs is much higher than the number of Americans starting to look for work again. The participation rate indicates improved conditions in the labor market.
In general, indicators point to economic growth in the second quarter of 2017, an acceleration of consumer spending, the manufacturing sector, and exports. Investment in fixed capital shows growth after weak dynamics in 2016, which is very important for the Fed.
Yellen equally does not rule out both acceleration and slowing of the US economic growth. A separate risk of uncertainty is the future tax and budget policy of the new president of the country, Donald Trump.
The Fed’s Balance Sheet Reduction Will Start With a Reduction in Reinvestment
Regarding the balance sheet reduction program, it was stated that it will start in 2017 with a reduction in reinvestment. That is, the Fed will begin to purchase fewer securities in place of redeemed or in place of interest income from its assets.
Yellen clearly indicated that the quantitative tightening program will not be used as an active monetary policy tool. The main tool remains the key interest rate. However, reinvestments will be resumed if necessary. The Fed plans to keep mainly Treasury securities on its balance sheet, as before the 2008 crisis.
Low Inflation Is Not an Obstacle for the Fed to Raise Interest Rates
One of the most concerning issues is weak inflation. The Fed chair stated that the decline in inflation in recent months was caused by falling prices in several areas. These factors are temporary.
Unlike her FOMC colleagues, Janet Yellen did not express serious concerns about low inflation, launching the asset balance sheet reduction program simultaneously with the process of raising the key interest rate.
On this background, the dollar recovered a significant portion of the positions lost the day before. The EUR/USD pair tried to break the 1.14 level but rebounded upwards, according to experts from ForTraders.org.
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FAQ
What impact does Yellen’s speech have on the dollar?
Yellen’s speech provided support for the dollar, helping it recover from losses.
Why is the labor market important for the Fed?
The labor market is a key indicator for the Fed when making decisions about interest rates and monetary policy.
How does the Fed reduce its balance sheet?
The Fed reduces its balance sheet by decreasing reinvestments, meaning it purchases fewer securities in place of redeemed or interest income from its assets.
