Yellen Testimony Reveals Hawkish Tone and Concerns over Dodd Frank

Chair Yellen took the stand for a second day of testimony, but this time in front of the House instead of the Senate.  Her prepared comments need to be word for word, relative to Tuesday’s prepared remarks, but the difference can come in the question and answer portion of the testimony.  Yellen prepared the markets for a chance of a rate hike on Tuesday, attempting to bring the markets to a level where there are no surprises if the Fed moves at its next meeting in March. There were questions and answers related to Dodd Frank regulation, where democrats attempted to enter a line of question that showed regulation was not hurtful, while republicans tried to ask about how regulation capped economic growth.

Presently the markets are not pricing in an interest rate hike in March, with the futures market only projecting a 20% change of a change to monetary policy.  This is up from 15% on Tuesday.  Wednesday’s release of U.S. CPI was stronger than expected and comes on the heels of a hotter than expected Producer Price Index.  This could be something that alters the Chair mindset.

The Labor Department reported on Wednesday that U.S. January CPI climbed 0.6%, with the core up 0.3%. There were no revisions to December’s respective gains of 0.3%, 0.2%. On an annual basis, headline prices are up 2.5% year over year versus 2.1% year over year, while the core increased to a 2.3% year over year pace from 2.2% year over year. Energy prices paced the strength, rising 4.0%. Transportation costs surged 2.2%. Apparel increased 1.4%. And commodities were up 1.0%. Service costs edged up 0.3%. Housing was up 0.3% too, with owners’ equivalent rent up 0.2%. Food prices were 0.1% higher.

In addition to inflation news, U.S. retail sales rose 0.4% in January, with the ex-auto component up 0.8%. December’s 0.6% headline jump was revised higher to 1.0%, while the 0.2% ex-auto gain was bumped up to 0.4%. These number were also stronger than expected. Gains were broad-based. Sales excluding autos, gas, and building materials rose a hefty 0.6% versus a 0.1% gain. Vehicle sales dropped 1.4% from a 3.2% December gain.