Fed’s chief Yellen’s Congressional testimony - BBH

Analysts at Brown Brother Harriman noted that Fed's Yellen has to navigate 3-key issues during her Congressional testimony this week. 

Key Quotes 

"Fed’s chief Yellen’s Congressional testimony. There are three main issues. First is the economic assessment. Little has changed since the FOMC statement. The Federal Reserve appears more confident in the resilience of the economy and the continued recovery in price pressures. She is unlikely to pre-commit the central bank to raising rates at any meeting, but will likely reiterate that the commitment to gradually normalizing monetary policy."

"Second, she will likely be asked about the Fed’s balance sheet. Several regional Fed Presidents have broached the issue. The official position, as has repeatedly been expressed in FOMC statements, is that when the normalization process is well underway, the balance sheet will be addressed. Yellen will be reluctant to commit to any fixed time frame, maximizing the Fed’s flexibility. She may deign to repeat some general principles, like eventually returning the balance sheet to all Treasury securities. She may offer that the first step would likely be a passively now rolling over maturing issues."

"Third, Yellen may be queried about the impact of fiscal policy on monetary policy. However, while there is little doubt that Fed officials are monitoring the progress of the tax proposals in the negotiating process, it still does not reach the threshold of a policy variable yet. It may before the mid-March FOMC meeting when forecasts will be updated."

"The US dollar is mostly firmer against the majors as the week starts. Sterling and Stockie are outperforming, while the yen and the Loonie are underperforming. EM currencies are mixed. TRY and RUB are outperforming, while PLN and INR are underperforming. MSCI Asia Pacific was up 0.4%, with the Nikkei rising 0.4%.  MSCI EM is up 0.5%, with China shares rising 0.7%. Euro Stoxx 600 is up 0.4% near midday, while S&P futures are pointing to a flat open. The 10-year UST yield is up 2 bp at 2.43%. Commodity prices are mixed, with oil down 0.6%, copper up 0.7%, and gold down 0.2%."  

"There is a lull in the maelstrom launched by the Trump Administration. His ban on immigrants from seven of the ten Muslim-majority countries in the Middle East has been stymied by the judicial system that has emerged as a check on the assertion of executive authority. The case appears to be on its way to the Supreme Court. He backed off after goading China by threatening to recognize Taiwan."

"After accusing Japan of manipulating its currency, Trump reportedly did not broach the topic with Prime Minister Abe in their meeting before the weekend. The Administration also eased some concerns by underscoring its commitment to NATO, despite Trump’s claim it was obsolete. Contrary to earlier reports, the US apparently has agreed to continue sanctions against Russia associated with the aggression in Ukraine. After seemingly encouraging a more aggressive Israel, President Trump warned that its construction efforts on the West Bank were not helpful for peace."

"Not only did Trump move back toward more traditional positions, but he also threw investors a bone. Investors and businesses have been eager for more details on the President’s economic agenda. After meeting with airline executives, Trump announced that “phenomenal” tax reform was a few weeks away. This seemed to be just what some investors wanted to hear, and the major equity indices were goosed to new record highs, and the US dollar had its best week of the New Year."

Yellen’s testimony: an opportunity for USD-bulls?