Federal Reserve (Fed) Chair Janet Yellen wrapped up the first leg of her two-day semiannual Monetary Policy Testimony to Congress a short while ago before the Senate Banking Committee. Yellen made prepared remarks and then took Q&A from the committee for more than two hours. Yellen will appear before the House Banking Committee tomorrow, Wednesday, February 15, 2017.
History of the “Humphrey-Hawkins” Testimony
Today’s testimony, which used to be informally called the Humphrey-Hawkins testimony, is required by the Full Employment and Balanced Growth Act of 1978 which, in turn, provides the basis for the Fed’s current dual mandate from Congress of promoting full employment and low and stable inflation. Augustus Hawkins was a congressman from California and Hubert Humphrey was Vice President of the United States in the 1960s, and in 1978, was senator from Minnesota. The Act also requires an update from the Fed on the state of monetary policy and the economy.
The Fed details its mandate from Congress here.
The Fed’s Semiannual Monetary Report to Congress can be found here.
This testimony is a very big deal for financial markets these days, but before the Fed Chair began regularly holding press conferences after Federal Open Market Committee (FOMC) meetings in 2011, it was an even bigger deal, as the only time markets could be certain they would hear from the Fed Chair was at these Humphrey-Hawkins testimonies. The Humphrey-Hawkins testimony was even more important in the 70s, 80s, and early 90s, when the Fed didn’t even release a statement after each of its FOMC meetings as it does today. As a reminder, the FOMC first issued a post-meeting statement in 1994, and in 1995 agreed that a statement would be released each time the Fed changed policy. It wasn’t until January 2000 that it began releasing a statement after every FOMC meeting, regardless of whether or not a policy change had been made.
Here’s what we learned from Yellen today. In her prepared remarks, Yellen said that “at our upcoming meetings the committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations in which case a further adjustment of the federal funds rate would likely be appropriate.”
The use of the words “at our upcoming meetings” was new, and suggested to the market that the next FOMC meeting (March 14-15, 2017) was a “live meeting.” Prior to today, the market—via the fed funds futures market—was pricing in just a one in four chance of a hike at the March 2017 FOMC meeting. Those odds are now closer to 40%.
Yellen did mention fiscal policy in her prepared remarks, noting:
Changes in fiscal policy or other economic policies could potentially affect the economic outlook. Of course, it is too early to know what policy changes will be put in place or how their economic effects will unfold. While it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic growth and raising American living standards with policies aimed at improving productivity. I would also hope that fiscal policy changes will be consistent with putting U.S. fiscal accounts on a sustainable trajectory. In any event, it is important to remember that fiscal policy is only one of the many factors that can influence the economic outlook and the appropriate course of monetary policy.
When pressed on fiscal policy during the Q&A, Yellen was typically noncommittal regarding her views on fiscal policy, noting that fiscal policy is up to Congress. She did not answer direct questions about the proposed “border adjustment tax” and noted that the “U.S fiscal trajectory was not sustainable” and that “fiscal sustainability has been a long standing problem.”
She also noted today as she has in the past, that:
- She intends to serve out her term as Chair (which ends in February 2018).
- Fed policy is not on a preset course, and any rate hikes would come only if the economy, labor market, and inflation tracked to the Fed’s latest forecasts.
- Rate hikes would be gradual, but waiting too long to raise rates would be unwise.
- The FOMC would raise rates three times in 2017.
- Every FOMC meeting is a live meeting.
Our view, as expressed in the Outlook 2017 is that the FOMC will raise rates two to three times in 2017. The next key events for Fed watchers are:
- A speech by New York Fed President Bill Dudley on Wednesday, February 15, 2017
- The release of the minutes of the January 31-February 1, 2017 FOMC meeting on Wednesday, February 22, 2017
- The release of the Fed’s Beige Book on Wednesday, March 1, 2017
- The February jobs report, due out on Friday, March 3, 2017
- A speech by Fed Vice Chair Stanley Fischer on Friday, March 3, 2017