Fed semi-annual testimony - more upbeat than usual

In the July semi-annual Monetary Policy Report to Congress, Chair Janet Yellen reiterated the message from her speech on Friday that a first fed funds rate hike this year is likely to be appropriate. In general, the testimony had a more upbeat tone than what was seen from Yellen at the June press conference. In particular, the risks to the outlook described in a more balanced way than usual, with more words spent on upside risks.

The description of recent developments in the labour market and growth in general was also positive, although 'indicators suggest that there is still some slack in the labour market'. On inflation, the Fed also seems only moderately worried about the low level of inflation 'to a significant extent, the recent low readings on total PCE inflation reflect influences that are likely to be transitory, particularly the earlier steep declines in oil prices and in the prices of non-energy imported goods, says Danske Bank.

On the outlook, prospects are favourable for further improvement in the US labour market and the economy more broadly' and risks were described as two-sided. 'As always, however, there are some uncertainties in the economic outlook. Foreign developments, in particular, pose some risks to US growth . Most notably, although the recovery in the euro area appears to have gained a firmer footing, the situation in Greece remains difficult and China continues to grapple with the challenges posed by high debt, weak property markets and volatile financial conditions. But economic growth abroad could also pick up more quickly than observers generally anticipate, providing additional support for US economic activity. The US economy also might snap back more quickly, as the transitory influences holding down first-half growth fade and the boost to consumer spending from low oil prices shows through more definitively.

One caveat in interpreting these comments is that Fed is under significant attack from Congress on its monetary policy implementation, in particular the QE programme. The most effective defence of Fed policy is pointing to the improvement in the US economy compared with other regions. With this in mind, the testimony could have a bias of putting more emphasis on the positive developments in the economy and downplaying the remaining slack, notes Danske Bank.