Fed Yellen's Testimony: No Urgency For A March Hike; We Still See 2 Hikes In 2017 - Barclays
We were listening to Chair Yellen’s testimony in front of the Senate in regards to three issues: the likelihood of a rate hike in March and the pace of rate hikes more broadly, how the Fed might respond to changes in fiscal policy, and her views on the timing of balance sheet runoff. Her responses were largely in line with our expectations heading into the meeting. Altogether, we view her comments as indicating that the median of three rate increases in 2017 that the Fed set out in its December forecasts remains in place. We retain our outlook for two rate increases in 2017, two more in 2018, and balance sheet reduction in early 2019.
No urgency for a March hike. The chair’s description of labor markets was constructive. She said that the unemployment rate is at the median of FOMC participants’ estimates of its longerrun normal level, labor underutilization has declined, and other measures of underemployment had improved. In addition, she noted that wage growth has picked up and reflects further job market tightening. Altogether, the characterization of labor market conditions indicates the committee sees the economy at, or close to, full employment. While the labor market data, on balance, provide the strongest case for a rate hike in March, muted wage growth and a rise in the unemployment rate in the January employment report will, in our view, give ammunition to those committee members who would prefer to stay on hold.