Yellen Fails to Sway the Markets; Stays in the Middle with “Not Too Hot, Not Too Cold” Remarks

Commodity and foreign currency markets were mixed and U.S. equity markets were mostly higher on Wednesday as investors processed comments and answers from Fed Chair Janet Yellen as she delivered her testimony before Congress. One key takeaway from her dialogue highlighted that if the U.S. economy were to disappoint, the Fed would have to reconsider its rate hike path.

Most critics dubbed her opening comments as non-committal. She acknowledged all the risks to the downside and the positives to the upside to her economic outlook without leaning in any one direction. At one point, Yellen answered a question saying, “I don’t think it will be necessary to cut rates but like I said monetary policy is not a preset course. “

Here are few of the highlights from her comments:

Asked whether she foresees the Fed cutting rates after just hiking its interest rate target in December, Yellen said she did not expect that to happen anytime soon as she considers the risk of recession low.

“There would seem to be increased fears of recession risk that is resulting in rising risk premia. We’ve not seen a sharp drop-off in growth, either globally on in the United Starts, but we certainly recognize that global market developments bear close watching,” she told the House Financial Services Committee.

The topic of negative rates also came up after the Fed told its member banks to prepare for negative rates just as a precaution and to include their effects in their next bank stress tests.

“I do not expect the FOMC is going to be soon in the situation where it’s necessary to cut rates,” she said. “Let’s not forget, the labor market is continuing to perform well, to improve. I continue to think many of the factors holding down inflation are transitory. We want to be careful not to jump to a premature conclusion about what’s in store for the U.S. economy.”

Questions over the legality of a negative rate environment were also raised. Yellen said the central bank first considered negative rates in 2010.

“We got only to the point of thinking it wasn’t a preferred tool,” she said. “We were concerned about the impact it would have on money markets, we were worried it wouldn’t work in our institutional environment.”

Finally, she was pressed about whether the Fed would be bound by set benchmarks or guidelines such as the Taylor rule which prescribes rates depending on economic milestones.

“The benefit of a rule-based system is it’s systematic and understandable,” Yellen said. She added that rules were a “useful benchmark”, but “we need to take into account a large set of indicators of how the economy is performing.”

In summary, Yellen said there are good reasons to believe the U.S. will stay on a path of moderate growth that will allow the Fed to pursue “gradual” adjustments to monetary policy.

The U.S. Dollar traded mostly higher before and while Yellen was delivering her remarks. This initially pushed stocks lower after strong pre-market gains. This encouraged gold traders to reconsider the long side after an early session steep sell-off. However, gold was unable to turn positive.

Both the GBP/USD and EUR/USD were under pressure, however, the Sterling came down from an earlier rally and the Euro traded mostly lower throughout the session.

The price action suggests traders were happy with Yellen’s assessment of the economy, but that she was neither dovish nor hawkish enough to generate a big commitment in either direction. The fact that the Fed funds indicator still shows that traders are giving any rate hike in 2016, a 20% chance, speaks volumes.