Fed Chair Janet Yellen has given her first day of testimony to Congress and caused the equity markets to jump to yet more record highs as she hinted that rate hikes would now be more gradual. However, it was a case of the market deciding which way it wanted to move as Yellen balanced her more dovish comments on rates with hawkish comments around the reduction of the Fed’s giant balance sheet.
Global inflation has been an issue for a long time now with many now moving to the opposite end of the spectrum, like the UK with its inflation too high. However, Janet Yellen told Congress that despite inflation not hitting the target yet, the Fed would still continue to push ahead with the reduction of its balance sheet. As mentioned earlier, the dollar and Wall Street decided to ignore the more hawkish comment in favour of reacting on the more simplistic comments on rates.
The comments were not anything the market hadn’t expected or heard previously, the minutes from last month's FOMC told a similar story, as did Yellen’s subsequent press conference. This testimony only reinforced the fact that the Fed was sticking to their plans, and that they see the US economy strong enough to cope with the removal of stimulus, despite inflation not being as high as they had wanted. Yellen painted a picture of the US economy that was cautious yes, but also one that was continuing to add jobs at a stellar rate. We can expect the reduction of the $4 trillion balance sheet to begin sooner rather than later.
The testimony will continue for a second day today this time to the Senate Banking Committee, but with the major headlines already out, we shouldn’t expect too much in the way of fireworks. The moves yesterday on Wall Street yet again saw the Dow Jones hit record highs, and weakness in the dollar. The Dow closed higher by 0.57% with the S&P500 up 0.73%, so far today futures are showing more gains on Wall Street.
Futures are pointing to a stronger open with the following moves predicted:
Dow Jones: + 16, 0.07%
S&P 500: + 3.5, 0.14%
Nasdaq: + 15, 0.26%