Yellen presented a positive view on the economy - Westpac

Research Team at Westpac, suggests that amid uncertainty in the wake of the election of Trump to the presidency, Chair Yellen presented a positive view on the economy to Congress’ Joint Economic Committee.

Key Quotes

“The clear implication for monetary policy being that the case for a rate hike “continued to strengthen”, with action to be taken “relatively soon”. Barring a material adverse shock, that means December.”

“Central to the FOMC’s positive view on the outlook remains the labour market. Their decision to wait “for further evidence does not reflect a lack of confidence in the economy”; rather the Committee believed that “there was somewhat more room for the labor market to improve on a sustainable basis” and wanted to capture that benefit for the economy. The potential for further gains rests on rising participation amongst prime-aged workers (those aged between 25 and 54), allowing labour supply to meet rising demand despite the influence of an ageing population.”

“Just released for October, CPI inflation data highlights that underlying inflation pressures remain robust but contained. The past year has seen core inflation remain a little above the 2.0%yr medium-term target, with services inflation (particularly the shelter component) the driving force. This is not to say that there is a need for rapid action on policy, but rather that gradual increases in the Federal Funds rate are prudent to manage the balance between demand and supply and therefore inflation.”

“Turning then to fiscal policy, there was little in Chair Yellen’s prepared remarks, but a few comments from the Q&A are worthy of discussion. First Chair Yellen emphasised that, with the economy at full employment, a large scale fiscal intervention to spur growth is unnecessary (and we might add potentially destabilising). Rather the focus needs to be on productivity and developing the long-term growth potential of the US economy. Chair Yellen also raised the issue of long-term debt sustainability and maintaining scope to support demand in the future, should a negative shock occur.”

“All told, Chair Yellen’s perspective is in line with our own and calls for three hikes to end-2017, beginning in December 2016. Fiscal policy could create concerns vis a vis inflation, but this will only be known in time. Indeed it is likely that considerable uncertainty will remain around fiscal policy for a protracted period.”