Fed Chair Yellen appeared before the Senate Banking Committee on June 21 to deliver her semiannual monetary policy report. She will appear before the House Financial Services Committee on Wednesday, June 22, to do the same.
Readers will recall that neither the directive, the Fed's updated economic and policy rate projections, nor Fed Chair Yellen's remarks at her press conference did much to help the Fed's credibility. In fact, it has been widely said that the Fed's credibility was diminished in the wake of those happenings.
Accordingly, it was thought Ms. Yellen's seat in front of the Senate Banking Committee would be hotter than usual. Surprisingly, it was not.
Many of the questions revolved around regulatory matters, the lack of diversity at the Federal Reserve, and the negative impact of globalization on the manufacturing sector. There was a good bit of attention paid to the upcoming Brexit vote, which Ms. Yellen conceded could have significant negative repercussions for the U.S. if the vote tipped in favor of leaving the European Union.
In some of her more enlightening remarks about the Fed's view of matters in the U.S., Ms. Yellen noted that the Fed is not considering negative rates, that she saw a low chance of recession in the U.S. this year, that she can't give a timetable for when the Fed will cut its balance sheet, and that the Fed would like to see a stronger labor market before raising rates.
That last observation is noteworthy simply on account of the fact that the Fed was slow to raise the fed funds rate when job growth was averaging more than 200,000 per month in 2015 and the unemployment rate fell from 5.7% at the beginning of the year to 5.0% by the end of the year.
The unemployment rate has subsequently fallen to 4.7%, aided by a drop in the labor force participation rate, yet nonfarm payroll growth has averaged only about 100,000 per month in April and May, excluding the effects of the Verizon employee strike.
The prepared remarks stipulated that it is important not to overreact to one or two reports; however, that seems to be exactly what the Fed did.
Only weeks before the May employment report, which showed just 38,000 jobs were added to nonfarm payrolls, multiple Fed officials, including Fed Chair Yellen, were prepping the market for a likely rate hike in June or July.
The Brexit risk, in turn, seems to have been escalated as a "cause for pause" in the Fed's consideration of matters. That's understandable, yet we have a hard time accepting the Fed's contention that labor market slowdown concerns are a basis now for not raising the fed funds rate when it passed on raising rates so often with monthly job growth in excess of 200,000 and the unemployment rate in steady decline.
We have acknowledged often that the unemployment rate is a bit of a misleading indicator given the drop in the labor force participation rate; nonetheless, it was something the Fed kept harping on as a sign of progress toward meeting the one side of its dual mandate, which is maximum employment.
One can go around and around debating the condition of the labor market, but it seems to us that the Fed, based on its own communications, missed a window of opportunity last year to justify additional rate hikes. Now, the Fed is stuck waiting for job growth to accelerate again.
Ms. Yellen remains hopeful that it will, but sounded otherwise resigned in front of the Senate Banking Committee to the possibility that it might not accelerate in such a way to convince the FOMC to raise the fed funds rate soon.
The fed funds futures market signals a 54% probability of a rate hike at the December meeting, which will come after the presidential election in November.
By and large, there wasn't much market response to Ms. Yellen's important testimony and remarks in the Q&A session.
That has to do in part with the understanding that she didn't make any new, market-moving policy insights. Then again, it might also have to do with some market resignation to the idea that Ms. Yellen's ability to sway markets now with her words isn't what it once was, because the Fed's persistent inaction continues to speak louder than those toothless words.