Yellen’s Testimony: What the Data Shows

  • Tuesday, February 14, 2017

Fed Chair Janet Yellen’s semiannual Congressional testimony scored more dovish* than her June 2016 testimony, signaling that a March rate hike continues to be unlikely.

Despite the five scheduled regional Fed bank president speeches this week, all eyes are on Janet Yellen’s semiannual Congressional testimony. Markets interpreted Yellen’s remarks as increasing the possibility of a March hike, causing stocks and treasury yields to rise. However, with a residual** score of -0.24, today’s remarks scored slightly more dovish than Yellen’s testimony in June of 2016, when she was priming the markets for a hike later in the year.

Our interpretation: With Fed momentum currently neutral at -0.05 and Yellen’s momentum more hawkish at 0.45, the moderate tone of today’s testimony continues to point to three rate hikes in 2017, but stops short of signaling a March hike. The market interpretation of Yellen’s testimony as hawkish does not signal an imminent hike. Instead, it points to the fact that the market has continued to under-price the possibility of three hikes in 2017, causing many investors to trade as though Yellen is hawkish even in cases of moderate sentiment.

We expect similar positioning from the other speakers this week: moderate-to-slightly-hawkish sentiment without any explicit signals of an imminent rate hike.

The Prattle Team

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* Prattle’s models are based on the historical relationship between central bank language and market reaction, which is used as the basis of evaluation for future communications. The scores are normalized around zero and range between -2 and 2, negative numbers indicating dovishness and positive numbers indicating hawkishness. Aggregate trend is the overall sentiment of the bank calculated using a LOESS fitting of trend using a 12-month window.

** Residual scores represent the tone of a communication compared to the rolling, 12-month average for that individual communication type or speaker. Raw scores represent the tone of a communication compared to the average of all communications. Momentum is the average of the last ten residual scores.

Disclaimer: the forecasts provided herein are based upon sources believed by Prattle Analytics, LLC D/B/A Prattle, to be reliable and to be developed from models which are generally accepted as methods for producing economic forecasts.

Prattle cannot guarantee the accuracy or completeness of the information upon which this Report and such forecasts are based. This Report does not purport to disclose any risks or benefits of entering into particular transactions and should not be construed as advice with regard to any specific investment or instance. The opinions and judgments expressed within this Report made as of this date are subject to change without notice.

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