Yellen: She’s Good at Playing Both Sides

The week started with all eyes on U.S. Federal Reserve Janet Yellen’s testimony before the U.S. House of Representatives on February 14 – 15. It was going to be Yellen’s first time in the hot seat in front of the new Republican Congress so investors were expecting fireworks, but the testimony ended with a whimper.

The first point of interest was supposed to be whether Yellen would provide any more guidance on the possibility of a March rate hike. Investors had written off the chance, pricing in just an 18 percent probability on February 10.

However, many economists were stoking the flames a little going into the event, saying that was too low, given that Yellen was likely to signal that the Fed was close to meeting its inflation and employment goals set by Congress.

Yellen was probably comfortable with the assessment by the economists, given the blueprint she left us in 2016. In my opinion, she didn’t want to be the one that told the markets with clarity and conviction that interest rates were going higher in March. Her style has been to get investors just excited enough to raise the probability of a rate hike to 50% then leave the other 50% up to the Federal Open Market Committee. As a government employee, I think it may be her “not on my watch” mentality that prevents her from actually making a commitment.

In the past, she has consistently expressed her fear of hiking rates because she didn’t want to create market volatility, or disruptions in the economic recoveries of other countries. Recent examples include postponing a rate hike early last year because of market turmoil caused by China. Then it was worries over the outcome of Brexit in June and finally the U.S. presidential election in September. She seems to be comfortable with rate hikes in December because after all, nobody creates volatility right before Christmas and the New Year.

So this week, Yellen stayed true to form by getting investors excited about a possible rate hike in March on February 14 by saying waiting too long to raise interest rates would be “unwise” as economic growth continues and inflation rises. Enough investors read her remarks as hawkish enough to drive Treasury yields higher and increase the chances of a March rate hike, by some measures, to 46 percent.

However, Yellen came back the next day and weakened her hawkish tone by saying, “Economic growth has been quite disappointing.” This helped put in a top in Treasury yields.

So at the end of this week, all we know is that Yellen is consistent in her ways and that perhaps we should be paying more attention to what other Fed members have to say rather than the Chair of the Fed.