No Yellen Just Talking Today

Includes: UDN, UUP
by: Dean Popplewell

President Obama's Fed Head current nominee Janet Yellen gets to hang out with the "big boys" later this morning. Does she have the goods to step up to the "big time" and sit at the head table? Her testimony at this morning's Senate Banking confirmation hearing is to be closely followed by all participants in capital markets, especially the Q&A portion now that her prepared opening remarks have already been leaked and digested.

Central Bank's rhetoric and action has so far this quarter put the forex market in a choke hold. Will investors get the green light from Yellen on tapering? She will certainly be expected to reaffirm her monetary views and probably reiterate her most recent of messages that "tapering is not tightening."

Ms. Yellen comes forth with all the required credentials – economist, policymaker and a firm negotiator - to successfully become the most powerful of central bankers. She currently possesses all the correct attributes to provide for a seamless transition of power from "Helicopter" Ben Bernanke to herself if her nomination is successfully upheld.

She is committed to the current Fed policy approach, as a co-architect of the current phase of the Fed's policy experimentation; she is a strong advocate of continued accommodation. Already her opening remarks, released just after the U.S. close yesterday were "characteristically dovish," stating that U.S. unemployment remains too high with inflation running below the Fed's +2% target and will continue to do so for some time.

As to be expected, the "mighty" dollar briefly sold off on the leaked statement while U.S. equity futures rallied. Prior to the release, the market had been worried that Ms. Yellen would try to strike a more "moderate tone to generate consensus among the hardline inflation hawks" – that certainly appears to have dissipated when her opening remarks were tabled.

On the back of the unexpected U.S. data last week (GDP growth and employment) had convinced some investors to consider the possibility of a December taper rather than one beginning in March 2014. Is that theory now being put on hold after her dovish comments? The liquidation of the original Yellen inspired long dollar positions are assumed squared in the overnight session.

Now that investors got a peek of her leaked opening remarks, the "substance" of her monetary views will surely be delivered during today's Senate hearings' Q&A session. Yellen believes the Fed has all the required tools necessary to deliver on its dual mandate even during the era of a dysfunctional Congress. There will be a time to taper and when it does, capital markets will be looking for that Yellen "sign post." Similar with investors, they should probably expect some compensation in the guise of a more "aggressive forward policy guidance."

What to look for? Confirmation that despite some imperfect tools at the Fed's disposable, U.S. policymakers are not yet willing to take their foot off the liquidity pedal. Perception is everything - Bernanke gets to keep his legacy intact and financial markets cannot afford Yellen to stumble just out the gates, global costs and risks are too high for that to occur. Being prudent is the answer – "excessive accommodation over premature tightening" should be winner in today's economic climate.

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