Wall Street flat ahead of Yellen testimony

Investor Signposts: Week Beginning February 13 2017

USA stocks traded near intraday highs on Tuesday after Federal Reserve Chairwoman Janet Yellen concluded her testimony before the Senate Banking Committee, signaling the central bank could gradually raise interest rates sooner than later.

Appearing before the Senate Banking Committee, Fed Chair Janet Yellen said "waiting too long" to hike rates "would be unwise".

"Changes in fiscal policy or other economic policies could potentially affect the economic outlook", she said.

Among the strongest signs of USA economic health, Yellen pointed to strides in the labor market, which gained on average 190,000 per month in the second half of 2016, and improvement in the unemployment rate, which was 4.8 percent in January.

Financial markets specialist Professor James Angel from Georgetown University explained why: "Often politicians will want central banks to do things that are short term expedient, but long term risky for the economy".

The US Fed's policy-setting Federal Open Market Committee (FOMC) raised rates in December for only the second time in a decade, but kept rates steady in January.

Fed Chair Janet Yellen has ascended Capitol Hill today for the first of two days of testimony in front of Congressionally leaders, colloquially known as the Humphrey-Hawkins testimony. During the financial crisis, the Fed purchased large-scale assets to hold down long-term interest rates.

In its meeting in February, the Federal Reserve choose to leave its key interest rate unchanged, though it suggested that the environment for rate increases is improving and measures of consumer and business sentiment continue to strengthen. US stock indexes opened slightly lower Tuesday morning after breaching record highs on Monday.

With at least three vacancies expected on the Federal Reserve's Board of Governors this year, the central bank may not be exempt from a Trump-led shakeup, strategist Mark Grant told CNBC on Monday.


The greenback was initially under pressure following the resignation of President Donald Trump's national security adviser, Michael Flynn, over revelations he had discussed US sanctions against Moscow with the Russian ambassador to the United States before Trump took office.

Over the weekend Fed Vice Chair Stanley Fischer said there was significant uncertainty about U.S. fiscal policy under the Trump administration, but that the Fed would be strict in meeting targets of creating full employment and getting inflation to 2 percent, according to Reuters.

Other officials have been more direct.

Market reaction was swift, with government bond yields climbing on the news, signaling that traders thought a Fed hike was coming in the near term.

Sen. Warren also prompted Yellen to comment on an assertion by top Trump economic advisor Gary Cohn, and former Goldman Sachs top banker, that banks, as a result of Dodd-Frank, have been forced to hold larger reserves that can not be leant to borrowers.

Yellen also said she agrees with the principles laid out by Trump's recent executive order on how the US financial system should be regulated.

Still, she added: "We're confident the economy is on a solid course and we have some ability to address weakness by cutting the federal funds rate, if needed".

On Tuesday Warren also sent letters to the White House, Department of Labor and Financial Services Roundtable to ask what role, if any, banking industry lobbyists had played in the development and drafting of Trump's recent executive orders on financial regulation. USA regulators are not required to implement global standards, but rather choose to do so because they think they are appropriate, he said.

Yellen was appearing in Congress for the first time since Republicans took control of the White House and both houses of the legislature and she nodded to the uncertainties over the direction of US economic policy.

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