Five things to listen for during Janet Yellen’s press conference
Clues as to future interest-rate path will be key for Fed press conference
Federal Reserve Chairwoman Janet Yellen has not spoken publicly since mid-July when she finished two days of testifying to Congress.
At the time, she expressed the view that the economy likely needed a rate hike this year.
But since she spoke the world has turned a bit upside down. Stocks slumped around the world on signs China’s economy was worsening. The dollar rose sharply against emerging market currencies and commodity prices dropped.
The big question is how these factors may impact on growth and inflation in the U.S. and how they are factored into monetary policy.
Here are the five key things to watch for on Thursday:
1. The two-handed economist
Yellen is widely expected to argue the other side of the Fed decision. So if the statement’s hawkish with a rate hike, Yellen will sound dovish and vice-versa, said Aneta Markowska, chief US. economist at Societe Generale. Only by hedging her answers will she “make everybody happy” given the wide divergence of views on the committee, Markowska said. She expects a quarter-point rate hike.
2. A rate hike will not destroy the economy
Josh Shapiro, the chief economist at MFR Inc. who thinks the odds favor a delay in liftoff until October, said Yellen will stress that a Fed rate hike will not destroy the economy. The first rate hike is just getting off emergency levels and it will be years before rates are at normal tight levels, he said. “That gets lost” in the Fed debate at the moment, he said.
3. Inflation quandary
John Silvia, chief economist for Wells Fargo, thinks Yellen will stress how Fed models cannot explain why inflation is so low given the decline in the unemployment rate. Admitting this puzzle will ease market pressure for another rate hike. “That would be the key for more flexibility” and show that the Fed will wait for more evidence before hiking again, he said. Silvia is in the September rate hike camp.
4. What data is the Fed depending on?
Kim Schoenholtz, who teaches economics at New York University, will look for clues from the Fed chief on what data will influence the way the U.S. central bank behaves. Data dependency has been the mantra for the Fed this year, he notes. In the wake of the financial market turmoil, data may start to shift in significant ways and how the Fed will view developments is key, he said. Schoenholtz thinks the Fed will stay on the sidelines this week.
5. Convincing markets that more hikes are not coming soon
Richard Moody, chief economist at Regions Financial Corp., says the Fed will hike rates. He thinks the biggest issue for Yellen is how she will keep markets from overreacting. “The biggest concern is that markets don’t go too far, too fast,” Moody said. While Yellen has stressed that future rate hikes will be gradual, after a rate hike “getting markets to buy into that would be a big challenge.” Yellen will need new language, he said.
Source: MarketWatch – Five things to listen for during Janet Yellen’s press conference
