Talking Points:

  • Federal Reserve Chair Janet Yellen spoke in Washington after market close on Friday
  • She said chance for short-term rates hitting zero at some point is uncomfortably high
  • While declined to comment on tax reforms, she hoped it will enhance the supply-side

What will drive longer-term FX market trends? See our forecasts here.

Federal Reserve Chair Janet Yellen spoke in Washington D.C. on Friday after market close about monetary policy since the financial crisis. While we couldn’t observe a US Dollar reaction, the DXY Index had by that point pulled off a partial recovery from last week as December Fed rate hike expectations firmed. That arguably began with Mrs. Yellen on Sunday. She then ended the week with a brief reality reminder.

According to the Fed’s Chair, it will take some years for the balance sheet to normalize as they reduce their security holdings. In addition, she said that unconventional policy tools will likely be needed again should a future economic downturn drive short-term rates back to their effective lower bound. Mrs. Yellen also offered an uncomfortably high probability that rates will essentially hit zero at some point, even in the absence of a major financial and economic crisis.

Later on during her Q&A session, Janet Yellen acknowledged that there is a concern that inflation is under 2 percent and that some survey measures of CPI have slipped. She also declined to comment on tax reform promises. Earlier that day, the Greenback soared as the US Senate passed a budget that would eventually clear the way for President Trump’s tax plan. The Fed Chair does hope that whatever congress passes will enhance supply-side economics.

Fed funds futures now price in an 83.6% probability that the central bank will raise rates in December. At the end of last week and before Janet Yellen spoke, they stood at 73.3%. Meanwhile, the DXY Index did not completely recover from last week’s reversal. It stands just a bit shy from the October 6th close.

Additional comments from Fed Chair Janet Yellen:

  • Short-term rates should remain the primary Fed policy tool
  • Inflation expected to rise to 2% over the next couple of years
  • Don't expect term premiums to jump due to the balance sheet unwind
  • Should keep option to use unconventional tools if needed
  • Important to have a track record of hitting the 2% target
  • Inflation expectations are well anchored
  • Definitely want to achieve our 2% inflation goal
  • Reasons for weak readings not clear, include one-offs
  • Fiscal policy among many factors affecting the US outlook
Fed Chair Janet Yellen Wraps Up Week With Remarks in Washington

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