Yellen’s speech and the shockwave

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Addressing the New York Economic Club on Tuesday, Yellen Janet marked her position regarding the future of the US Economy and the steps taken by the Federal Reserve. In fact, the 69 years old Fed Chairperson who was previously the President and Chief Executive Officer of the Federal Reserve Bank of San Francisco, made a strong turn and took a different line compared to the other Fed officials.

She emphasized on the fact that the US Central Bank should move cautiously with regards to its upcoming intent to raise interest rates. Putting sideways ,at the same time, the previous comments of her colleagues who suggested another increase might be happening soon in April. During that same meeting, Yellen spoke about the different international developments and how could these hinder the American as well as the world economy.

Following two weeks of steady hold on the rates by the Fed, Yellen acknowledged that the inflation has not yet proven to be durable enough to withstand the ominous global risks threatening the US economy. And there are many more to that - The still-low oil prices (Read more: Who to blame for crude oil prices ) and concerns over the recent development in China’s economy are giving the US economists food for thoughts and information to ponder on for the coming months. Meanwhile, Yellen seized the opportunity of her speech to stress on the changes made to the Fed interest rates over the past months.

The Interest hikes of Fed

According to an analysis of the six rate-hike economic cycles over the last three decades by CNBC last year, increase in interest rates often showed some optimism in the economy. As such, this is often accompanied by falling unemployment, rising stock prices and solid economic growth. It is to be noted that Fed increased its interest rates only 8 years after the financial crisis of late 2007. However, March 2016 was a month of overseas economic activity slow-down according to the Fed. Besides, the officials took the decision to lower the economic expectations and only predicted about two rate hikes in the same year while back in December, four hikes were expected. The very fact that the economic activities have been expanding at a reasonable pace over the past months despite the financial instability across the world, led to the Fed taking the decision to unlock the pause button over an increase in the interest rates.

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However, during her speech, Yellen strongly gave the impression that interest rates increase will take place but not as soon as in April 2016. In fact, she adopted a cautious approach and urged the central bank to be very attentive to the recent economic development that happened in the world’s economy. She outlined three main factors that could hinder the US economy. These are

  • The Low crude price
  • The slow economic growth
  • And, the uncertainty of the Chinese economy.

Yellen’s worries about the oil prices

During her speech on Tuesday, Yellen also showed some reserves to the constant imbalance between supply and demand of oil in the world market. In fact, on Tuesday the oil prices fell again by 3 percent as investors witnessed an increase in the supply from the Arabian countries namely from Kuwait and Saudi Arabia. Following the removal of international sanctions against these two countries, they both decided to relaunch their oil co-production of 300,000-barrels-per-day from the Khafji field. This led to a bearish supply over the market and diminished the hopes of economists to see a rebalance between the supply and demand of oil. It is to be noted that both Kuwait and Saudi Arabia figure among top OPEC producers and the decision to relaunch their production will have an incidence on the global oversupply and demand rate, thus adding to the effects of Iran’s refusal to be part of the negotiations during OPEC’s meeting on the 17th April.

Aftermath of Yellen’s speech on Oil price

Janet Yellen agreed that the sluggish oil prices will be beneficial for oil-importing countries in the long run. "The apparent negative reaction of financial markets to recent declines in oil prices may in part reflect market concern that the price of oil was nearing a financial tipping point for some countries and energy firms," she said. She also pointed out that the downfall of oil prices might have a negative impact on the development of the economy. Several questions arose following the link between Oil prices and global economic situation. In fact, many questioned the very fact whether Fed’s probability to increase interest rates depends on how the black gold is performing. This unanswered question had a shock wave over oil prices in addition to the supply of Saudi Arabia and Kuwait.

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International price benchmark, Brent crude closed lower on Tuesday but had a momentaneous relief on Wednesday after the dovish speech of Yellen that also hit the US dollar. But, it dropped back again. As of Wednesday 31st March, Brent LCOc1 futures settled down by $1.13 at $39.14 a barrel while U.S. crude CLc1 settled by $1.11 lower at $38.28 per barrel.

Slow Economic growth looming at the US Economy

Another takeaway from Yellen’s speech in front of the New York Economic Club, is the fact that she stressed upon being cautious due to the omnipresent risks that a slow global economic growth represents to the US economy. At their March meeting, Fed officials left short term interest rates unchanged while making a more optimistic forecast over the U.S. economy. However, they reduced their projection for interest rate rises over the year - forecasting a total increase of half a percentage point in comparison to the full percentage point increase they predicted back in December 2015.

According to Yellen, global economic development represents a constant risk that the US shouldn’t ignore though the Fed officials agreed that the US economy is performing better since the beginning of the year. Pointing out the slowdown of the chinese economy and the decrease in the prices of oil, she added that if these weaknesses could harm the US, “We’d want to get ahead of that development and adjust our thinking about the path of policy and act to counteract it,”
As a matter of fact, investors acclaimed her comments on Tuesday, sending, at the same time, the US stocks and Gold prices higher while on the other side, Treasury yields and the dollar plummeted.

What’s about the US Economic Growth in a nutshell?

It’s a fact that the US Economy is on the slow growth. Despite issues resulting from a strong dollar, low oil prices and an excess of business stocks - The economy is sustained by the consumer spending and construction sector. The US economy grew at a 1.4 per cent annual rate in the October-December period which is better than the 1 percent growth estimated by the US government back in February. “Real economic growth was stronger than we thought late last year, and this makes us more hopeful that the first quarter will be better than expected,” said Chris Rupkey, chief economist at MUFG Union Bank in New York. Another weakness of the actual US Economy growth result from the low prices of oil. The drop in oil prices resulted in a layoff at energy companies, while on the other side it also resulted in sharp reductions in investment on drilling and exploration.

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Chinese uncertainty and the US Economy

The Fed Chairperson pointed out the global consensus that there is a slowdown in the Chinese economy as the country is in transition from investment towards consumption and from exports to domestic growth sources. Indeed, there is the element of uncertainty arising on how this transition will happen smoothly and what are the financial implications which will result for it. “These uncertainties were heightened by market confusion earlier this year over China’s exchange rate policy” Yellen added.
Even though China has designed several policies to support its market, Fed official are worried on how this will be communicated and what would be the impact on the Global economy.

Yellen’s comment and its shockwave on the Chinese

Yellen’s dovish comments on Tuesday regarding the chinese economy had a real shockwave. As she urged the US central bank to be cautious on raising interest rates, hence supporting the appeal of riskier assets, Asian stocks gained value led by the Chinese equities.

Key Take away for the traders

Janet Yellen urged the US Central Bank to be cautious on taking a step to increase interest rates as she fears the looming of negative impact of major world events on the country’s economy. According to her, there are three major events happening in the world namely :-

  • The Low crude price
  • The slow economic growth
  • And, the uncertainty of the Chinese economy.

These are important for the traders to consider while doing their Fundamental and technical analysis for these events will eventually have major impact on the world assets.

Priscilla Camryn By: Priscilla Camryn
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