Interest Rate Direction Uncertain after Dovish Yellen Expresses Concerns Over Inflation

On Wednesday, U.S. Federal Reserve Chair Janet Yellen testified before the Senate Banking Committee on inflation, the Fed balance sheet and interest rates.

While most Fed officials believe the current muted inflation figures are probably transitory, Yellen sparked a few concerns when she expressed concerns about inflation and hinted that perhaps it may not be transitory factors pressuring inflation.

“Temporary factors appear to be a work. It’s premature to reach the judgment that we’re not on the path to 2 percent inflation over the next couple of years. As we indicate in our statement, it’s something we’re watching very closely, considering risks around the inflation outlook,” Yellen said, during a question-and-answer session.

Yellen also added that monetary policy is not on a preset course. “We’re watching this very closely and stand ready to adjust our policy if it appears the inflation undershoot appears consistent.”

U.S. Treasury Yields

U.S. Treasury yields fell on Wednesday as investors digested the latest remarks by Fed Chair Janet Yellen. Treasury instruments rallied after investors interpreted Yellen’s testimony to mean the central bank won’t be hiking rates all that much.

Lower Treasury yields helped boost demand for higher yielding assets like stocks while pressuring the U.S. Dollar off its highs.

Crude Oil

Oil prices retreated from earlier highs on Wednesday after U.S. government data showed U.S. crude stocks fell more than expected the week-ended July 7 as imports declined and drillers continued to produce more.

According to the U.S. Energy Information Administration, crude inventories declined by 7.6 million barrels last week, compared with analysts’ forecasts for a decrease of 2.9 million barrels.

Gasoline stocks also fell more than expected. The EIA report showed inventories fell by 1.6 million barrels, compared with analyst’ expectations for a 1.1 million barrel gain. Distillate stockpiles rose by 3.1 million barrels, versus expectations for a 1.1 million barrels increase.

The EIA report also showed that U.S. oil production inched higher by 59,000 barrels a day to nearly 9.4 million barrels a day.

In other news, OPEC said its oil output rose by 393,000 bpd in June to 32.611 million bpd led by a rebound in Nigeria and Libya, plus a few extra barrels from Saudi Arabia and Iraq.

A Saudi industry source also said the country planned to reduce shipments in August by more than 600,000 bpd, taking exports for that month to their lowest this year.

Finally, OPEC forecast the world will need 32.20 million bpd of crude from its members in 2018, down 60,000 bpd from this year.