Yellen Retreats Even Further From Rate Hikes In Testimony

How quickly things can change. Before the May unemployment report came out on June 3, Fed officials seemed to be poised to raise interest rates in June and, if not, then in July.  That would be followed by at least one more increase later on this year.  Well all that changed with one of the weakest employment reports in months and the Fed held interest rates steady after their meeting last week, although Fed Chair Yellen did make a half-hearted attempt to keep a July increase alive while focusing on the fall as a more likely candidate.

This week, Yellen make the second of her semi-annual reports to Congress, yesterday testifying to the Senate Banking Committee and today to the House Financial Services Committee. Her testimony yesterday was downright dovish, indicating concerns that growth may not return to “normal” levels for much longer than anticipated which would require an even more extended period of low interest rates.  The urgency to raise rates that had permeated Fed statements before June were now gone as was the confidence in a faster-growing economy. Based on her testimony, it would seem that there might be only one rate hike in the offing for later this year, but even that seems in doubt. Of course, there will be lots of new data between now and then but it does seem as though the unfounded desire that some members of the Fed has to get rates back to a “normal” level has dissipated.

This will be another blow to the Fed’s credibility – the December rate hike was a disaster and, despite market expectations of continuing low growth and inflation, the Fed keeps on talking up rate hikes only to have to back off when the data does not support it.  Hopefully, with this latest retreat, a chastened Fed will actually wait until growth and inflation actually get above target before they talk up rate hikes again.