By Krishna Memani, CIO
I heard Federal Reserve (Fed) Chair Janet Yellen speak on March 29 at the Economic Club of New York in Times Square.
If Yellen is worried about the U.S. growth outlook, which she clearly is based on her speech, she most certainly would not have seen any signs of slowing growth in the hustle and bustle of tourist-overrun Times Square.
Nevertheless, in stark contrast to the other more hawkish Fed speakers, Yellen was especially dovish in this speech.
She asserted that the base outlook of the policy making Federal Open Market Committee (FOMC) has not changed that much between its December and March meetings. Yellen also talked a lot about the downside risks that have arisen in the last few months, primarily due to the weakening global growth outlook. Then she indicated that the FOMC is likely to proceed cautiously on further interest rate hikes.
Backtracking on Further Tightening?
However, what I found particularly dovish was this rather unusual statement:
"Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy. This caution is especially warranted because, with the federal funds rate so low, the FOMC's ability to use conventional monetary policy to respond to economic disturbances is asymmetric. If economic conditions were to strengthen considerably more than currently expected, the FOMC could readily raise its target range for the federal funds rate to stabilize the economy. By contrast, if the expansion was to falter or if inflation was to remain stubbornly low, the FOMC would be able to provide only a modest degree of additional stimulus by cutting the federal funds rate back to near zero."1
That is an especially profound statement and a bit of a turnaround from Yellen's previous position. In the past, Yellen had indicated that she would like to tighten sooner, although gradually, because if inflation rises and the Fed has to be more aggressive, the impact on the U.S. economic outlook is likely to be more significant. Now, she seems to be saying the exact opposite and is closer to my personal viewpoint.
Further, in a conversation about whether to tighten or not to tighten, Yellen made sure that she categorically mentioned the possibility of further policy easing by the Fed if the situation warrants. Again, I believe this is highly dovish with a specific objective of ensuring that the dollar does not appreciate significantly if other central banks provide further policy easing.
Bottom line: From my perspective, Yellen's latest remarks are especially dovish. For an investor, it means equities and credit should continue to perform well and rates should not rise much, if at all. Further, it will take a lot of good data to stop the dollar from the slow weakening path it is on at the moment.
Yellen's remarks in New York follow on the FOMC's statement earlier in March and further indicate, as I noted in a previous post, that the Fed is doing the right thing for the U.S. and global economies.
1 "The Outlook, Uncertainty, and Monetary Policy," remarks delivered by Federal Reserve Chair Janet L. Yellen at the Economic Club of New York, March 29, 2016.
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