Fed Chair Yellen: Balanced risks amid improving data

In her written testimony before the House Financial Services Committee, Federal Reserve Chair Janet Yellen sounded somewhat less dovish than in her speech last Friday before the City Club of Cleveland.  In part, it is believed the change in tone as reflecting the change in audience, says Barclays.

In the testimony, she sees more momentum, less slack, and less uncertainty than she evinced in her last few public appearances. In particular, the Chair noted substantial improvement in the labor market and referred to "some," rather than "unusually large," slack in the labor market.  Incoming data suggest a "moderate pace of GDP growth in Q2" as transitory influences that held down Q1 growth abate and as "sales of motor vehicles in May and June were strong," indicating a pickup in consumer spending. Most importantly, Chair Yellen noted that "prospects are favorable for further improvement in the US labor market and the economy more broadly" and that "the US economy might snap back more quickly" than expected.  These statements are in broad contrast to the assessment of risks she gave last Friday where she said "the course of the economy and inflation remains highly uncertain", says Barclays.

Giving us comfort over our rate call, the Chair stated that "if the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy.  Indeed, most participants in June projected that at least one rate hike would be "appropriate before year end."  As such, we stand by our call for a September rate hike but continue to note that a flare-up in volatility driven by developments abroad or a few disappointing data releases could easily push the hike into December or even March.