The focus of today’s blog is exclusively about a market moving speech made by the Chairwoman of the Federal Reserve, Janet Yellen, at the Economic Club of New York. Let’s make no bones about it, the speech was dovish, she seemed to highlight every case doves are likely to make about the US and global economies. It is likely, after this speech that interest rate rises in April are off the table and perhaps even the peak level of interest rates at the end of this hiking cycle might be in question. The bottom line is that the dollar sold off heavily and equity markets rallied. This was unquestionably a boon for risk markets and even the most unloved emerging market currencies like the Russian rouble and Brazilian real have profited at the dollars expense. This is such a broad based rally that its effects are likely to be lasting. Over the coming days we will re-assess our views and the key technical levels we have been monitoring, this could be that important.
Here are some of the key points Janet Yellen made:
- Federal Reserve will proceed cautiously in lifting interest rates
- Fed’s estimate of longer term rate of unemployment might be too high – if this is the case then the US labour market is not as tight as policy makers think, and the risk of wage inflation is less. Basically the current low level of unemployment should not be used as a justification for a rate hike
- Inflation outlook has become more uncertain since the start of the year – while core inflation looks to be creeping higher, inflation indicators are falling. And furthermore there is still no sign of wage inflation. Which supports cautiousness regarding rate hikes
- Weaker than expected overseas growth – the Chinese economy and the oil & gas sector remain big concerns for US policy makers. Both represent potentially significant negative shocks to the US economy, which would justify caution regarding interest rate hikes.
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