On Tuesday Fed Chairwoman Janet Yellen will be offering some prepared statements from the Fed’s policy outlook at 8:30 a.m. EST in front of a Republican majority House Financial Services Committee before responding to questions at 10:00 a.m. as investors cling to her words to understand new themes about the Fed’s monetary easing program.
Before Yellen took over as Fed Chairwoman in early 2014, the Federal Reserve had already begun to scale back its third round of quantitative easing (QE3) program at a pace of $10 billion per month, signaling a monumental shift in the Federal Reserve’s monetary stimulus policy that helped to drive long term interest rates lower, provided excess liquidity for stock markets to reach record highs, and motivated investors to seek higher yield returns in riskier emerging market economies.
Two months of (QE3) tapering in 2014 has reduced the Fed’s monthly purchases of Treasuries and mortgage backed securities from $85 billion to $65 billion and eased up on the ultra accommodative monetary policy of the Federal Reserve that helped to steer the economy towards growth despite swelling the Fed’s balance sheet to over $4 trillion since the Federal Reserve first began their quantitative easing monetary stimulus program in the depths of the recession in December 2008.
The fallout of the Fed’s tapering in 2014 has resulted in a January stock pullback that brought more volatility into the market and caused global investors to pull liquidity away from emerging markets economies while fleeing to safer returns such as the 10 yr. Treasury that declined for much of January and fell below 2.6 percent on February 3rd.
Although the Federal Reserve has scaled back the pace of their quantitative easing program at a monthly pace of $10 billion per month in 2014, the U.S. labor market has shown some recent weakness, registering two weak months of employment gains with non-farm payroll gains of 113,000 in January and only 75,000 in December, the lowest number since October 2011, while the unemployment rate has decreased by 0.6 percentage point since October and fell to 6.6 percent in January, the lowest employment rate in five years.
Yellen will respond to policy and Fed outlook questions, taking into consideration the past two soft employment reports along with the low U.S. inflation reading which recorded at 1.50 percent in December of 2013 and is still below the Fed’s 2 percent inflation target.
Yellen is expected to articulate the sentiment of the entire Fed Committee regarding the Fed’s policy and not just her own views which are perceived to be in the dovish camp along with former Fed Chairman Ben Bernanke and several other Committee members.
Another important topic that Yellen is expected to make on Tuesday concerns the issue of Fed policy concerning forward guidance and short term interest rates.
Yellen will likely speak about the 6.5 unemployment rate being a threshold and not a target for tightening Fed policy and raising short term interest rates which is another separate form of decoupled monetary stimulus from the Fed’s quantitative easing program.
Since December 2008, the Federal Reserve’s target for the federal funds rate has been between 0 and 1/4 percent.
The Fed has already pledged to maintain their current target range for the federal funds rate “well past” the time that the unemployment rate declines below 6.5 percent, especially if projected inflation runs below the Fed’s 2 percent inflation goal.
Later on Thursday Yellen will face the Senate Banking Committee on Capitol Hill.