Instant Analysis: Janet Yellen seeks flexibility on rate hike timing
Janet Yellen did not stray very far from the context of the January FOMC minutes in her Congressional testimony this week. It’s pretty clear the FOMC is still in wait-and-see mode, and has yet to ultimately make up its collective mind on the exact date of liftoff.
I am still forecasting a June liftoff, but that is clearly the earliest date among several the FOMC is currently contemplating. As I wrote recently, the market seems to be pushing rate-hike expectations out to October or later.
Yellen and the FOMC have not yet pinpointed the exact liftoff date for rates, given the conflicting cross-currents in the economy and inflation. There still appears to be widespread disagreement on when to actually pull the trigger. However, the June or September FOMC meetings remain the most likely candidates for liftoff.
Yellen is positioned for extreme flexibility and doesn’t want to be tied into a narrow timeframe by the market. She also doesn’t want a premature tightening of financial conditions in anticipation of the rate hikes. Separating the removal of the “patience” language from the date of actual liftoff gives the FOMC even more flexibility and will keep the market guessing right up to the decision date. Even if they strike the “patience” language in March, the FOMC could still refrain from liftoff at the June meeting, should the data warrant a delay.
The door is still open for a June liftoff, but only by a crack. June appeared too soon for some at the January FOMC meeting, raising the chance it could be September. However, I do believe inflation expectations and oil prices have turned the corner since the January FOMC meeting, and additional monetary policy actions abroad bolster the outlook for the global economy, so maybe the door has opened a little wider recently for a June liftoff.
The markets seem to be over-playing the dovishness of her comments Tuesday when what she is really trying to achieve with her testimony is more flexibility from the market, should the need arise.