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Yellen's "Humphrey-Hawkins" Testimony Preview: "Don't Rock The Boat"

Fed Chair Yellen will be presenting her semi-annual monetary policy testimony - sometimes called the "Humphrey-Hawkins" testimony - on Tuesday and Wednesday of this week. Goldman expects Yellen not to stray far from the message of the January FOMC statement and meeting minutes, seeing it unlikely she will preempt the Committee by sending a strong signal on whether "patience" will be removed from the statement at the March meeting. The testimony will probably not be a major market mover. Nonetheless, to the extent there are risks to our "don't rock the boat" expectation, Goldman thinks they are skewed toward a slightly more dovish tilt.

 

Via Goldman Sachs,

By way of logistics, Fed hari Yellen will be testifying to the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday. Yellen's prepared remarks are expected to be released at 10:00AM on Tuesday, in contrast to 8:30AM, which has recently been customary when the first day of testimony has occurred in the House. The same prepared remarks will be used for both days of testimony.

In the second day of last February's testimony, Yellen deviated a bit from her prepared text while presenting her opening statements, but this was probably due to the unusually long sixteen-day lag between the first and second day of testimony caused by snow delays. This year we would expect no difference.

The Q&A session will probably begin quite a bit after the scheduled 10:00AM start time—perhaps half an hour later—as it will take some time for Yellen to read through her opening remarks and for Senators to make opening statements. In addition, it is not uncommon for the hearing to start later than the officially scheduled time.

Regarding our expectations for the testimony, we expect Yellen not to stray far from the message of the January FOMC statement and minutes. Specifically, we do not think she will want to preempt the Committee's decision on whether the "patience" forward guidance should be retained, dropped, or amended at the March meeting, which would have significant implications for the market's view on the likely timing of the first hike. On the one hand, we think she is likely to acknowledge the recent strong labor market data. On the other hand, the broader set of US activity data has not been as robust recently, and the inflation outlook has dimmed. To the extent Yellen deviates at all from recent Fed communications, we think the risks are skewed toward a slightly more dovish tone.

Apart from the question of when the first hike will occur, which Yellen will probably not answer, a few key issues to watch include:

(1) In the December press conference, Yellen indicated that rate hikes could occur even if core inflation remained close to current levels—which at that time was 1.6% year-on-year according to the core PCE price index—as long as the Committee was "reasonably confident" that inflation would return to the 2% target over time. With core inflation having moved down to 1.3% YoY since that statement was made, oil prices declining further, and the dollar continuing to strengthen, has the Fed shifted its view on this?

 

(2) Does wage growth gain more prominence? In the past, the Fed has occasionally seemed to place considerable weight on wages as both a measure of inflation and also a cross-check on the amount of slack in the labor market. If wages figure prominently in Yellen's remarks, that would likely signal a slightly dovish shift given the lack of any appreciable pickup from the roughly 2% pace seen over the course of the recovery.

 

(3) Any shift in her assessment of the incoming activity data. Is the softness in December and January core retail sales a concern in light of the anticipated boost to consumer spending from lower gasoline prices? What about the downshift in some of the manufacturing sector data?

 

(4) How will the path of the fed funds rate look after the Fed decides to start hiking? Should we expect a fairly steady slow pace of rate hikes or more substantial data-dependency?

 

(5) Has the Fed shifted its view on balance sheet policy at all? Despite the sell-off so far in February, longer-term yields have been sustained at levels below what most observers would have expected a year ago, in part due to new QE programs in Japan and the Euro area. With this backdrop, would an earlier end to reinvestments or even asset sales make sense under some circumstances?

 

(6) Has the plan for exit shifted? Although the Fed has repeatedly referred to the fixed-rate reverse repo facility as a "backup" or "secondary" tool, the January minutes suggested that the cap on the facility size could be significantly increased or even eliminated in the early stages of the exit.

Although these questions will be important, we don't expect Yellen's semi-annual testimony to be a major market mover. With the advent of post-meeting press conferences, and more generally in the post-Greenspan era taken as a whole, the semi-annual testimony has diminished in importance. Indeed, Exhibit 1 shows that the average absolute change in 10-year Treasury yields around the semi-annual testimony has declined over time, and is considerably lower than the average absolute change around post-FOMC press conferences.

Exhibit 1. Semi-annual Monetary Policy Testimony Isn't What it Used to Be


 
The Fed will also release its semi-annual Monetary Policy Report at 10:00AM on Tuesday February 24, which is a roughly fifty-page document that provides additional background, charts, etc. supporting the Chair's testimony.

Typically, this document generates very little interest. However, the July statement that "valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries," received considerable attention.