Yellen Provides Dovish Undercurrent

In her first semiannual testimony to Congress, Janet Yellen downplayed recent global market volatility and pledged her continuation of the path forged by Ben Bernanke.

While noting that 1.25 million jobs had been added to US payrolls since Bernanke’s farewell delivery to Congress in July, lifting the total since prior to the onset of QE3 to 3.25 million, the new Fed chief downplayed progress made in lowering the headline-capturing reduction in the rate of unemployment to 6.6%. “Nevertheless, the recovery in the labor market is far from complete,” Ms. Yellen noted.

By doing so Ms. Yellen has reminded investors that the window for raising the short term fed funds rate remains firmly shuttered. Ms. Yellen noted that those out of work for more than six months comprise an unusually large fraction of the unemployed at a time when the overall rate remains well above the estimate amongst the committee that is consistent with maximum sustainable employment. These points bring us back to Mr. Bernanke’s earlier comments aimed at settling the market as it tried badly to digest the onset of taper in the fall. Mr. Bernanke noted at the time that it wasn’t simply good enough to rely on the headline reading when internal metrics contradicted significantly with the improvement seen on the surface.

Recent market turmoil, while requiring further observation, does not yet pose risks to the US economy, noted Ms. Yellen. Continuity and stability of policy measures remain the order of the day according to the theme of her short text. The policy mix of asset purchases and forward guidance have supported the recovery through exerting downward pressure on longer-term interest rates. It appears that investors expect more of the same as a result of Ms. Yellen’s first appearance in her capacity as head of the FOMC. Stock index futures maintain a positive tone ahead of the open, although gains have been halved to an advance of just 2.5-S&P index points, while bond futures remain 10-points lower with the benchmark treasury yielding 2.70% (+3bps).

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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