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Yellen's Testimony Welcomed by Capitol Hill, White House

Wednesday, July 12th, 2017

Fed Chair Janet Yellen’s appearance today on Capitol Hill is welcomed by all sorts of market participants — not the least of whom are President Trump and his immediate family: Ms. Yellen’s discussion of interest rates and a normalized balance sheet should knock Donald Trump Jr’s problems (regarding his interest in colluding with the Russian government to help his dad win last year’s presidential election) off the front headlines, at least temporarily.

Yellen’s testimony begins at 10am ET, after the opening bell, but her prepared statement has already been released. In it, she pointed to a shrinking balance sheet, “appreciably smaller than the current $4 trillion” currently on the books, but still more than prior to the Great Recession. The Fed Chair said she will be carefully monitoring inflation metrics, one of the main variables the Federal Open Market Committee (FOMC) will take into consideration. She mentioned inflation and fiscal policy as being two questions she still has when considering her economic outlook.

Further, Yellen was careful to spell out that she drew no direct correlation between normalizing the Treasury balance — essentially by stopping the reinvestment of mature bonds back into the Treasury, which had helped ease conditions as the U.S. fought its way through the economic hardships that befell the country starting late 2008 — with raising interest rates further. While analysts view the FOMC meeting on September 20 as the time normalization will commence, the possibility of the FOMC raising interest rates another 25 basis points at that time is considered much less likely ahead of Yellen’s Q&A with members of Congress.

Right now, analysts look toward December as the third and final rate hike of 2017. Yet Yellen’s testimony today may alter these odds somewhat. There is a veritable cottage industry dedicated to parsing the terminology of the Fed Chair’s comments, and should those involved determine a shift either more hawkish or dovish than previous statements, we may see market activity tack one way or the other today or tomorrow.

Ahead of the bell today, futures are up on the release of Yellen’s prepared remarks. This shows that those commentary parsers are already betting that she will help keep rates lower for longer, and now we see the Dow up roughly 100 points. This is following a Tuesday that saw its early-morning momentum crushed by the Trump Jr email headlines. That the markets were able to claw back to unched overall yesterday was a real feat; can this momentum be regained as the storm clouds of scandal creep over the nation’s capital?

Mark Vickery
Senior Editor

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