One could expect the Federal Reserve chair nominee Janet Yellen to very much explain the Fed policies because she has been the Fed vice-chair for the last two years. She has very much bought into the strategies being pursued by Bernanke said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce.
That pretty much boxes analysts into a corner ahead of her testimony, because everybody’s perceived that her dovish tendencies coming out of the statement. So even a relatively balanced testimony in the Q&A and perhaps not wanting to alienate some of the Republican minority members of the Senate Banking Committee could actually start reign back in some of the expectations of a stimulatory monetary policies now, that could well see the US yields moving higher again and dragging the dollar with it, Jeremy said.
Asked how much dovishness is actually priced-in by the markets, Jeremy said a considerable amount since that has been the ongoing and overriding assumption. Her candidacy was always an expectation of an extension of the status-quo and maybe even a little more that – this perception that she is an “uber-dove”.
However, that perception may be a little misguided because she is much more pragmatic than that, which she would probably like to underline in her confirmation hearing. She would clearly like to support the recovery and underpin the Fed’s mandate in terms of employment growth, but that doesn’t necessarily override everything else, Jeremy said.
Asked if European Central Bank President Mario Draghi will be closely watching the developments in the US, Jeremy answered in the affirmative. A dovish Yellen makes life all the more difficult for Draghi because the markets are witnessing the cross currents of global monetary policy influences.
The expansion of the Fed’s balance-sheet over the course of the last twelve months or so, as the ECB’s has been contracting, has been one of the defining factors which have really supported the EUR/USD pair. If the markets witness an extension of the Fed policies over the medium term – if that’s the assumption after her testimony on Thursday – that will just further underpin the EUR/USD story. That’s bad news for the European periphery when we are just seeing the eurozone managing to count just 0.1 percent growth q-o-q in the third quarter, he observed.
Asked if Draghi & Co has to put in place more policy measures if the Fed’s QE program stretches further, Jeremy said the greater the risk, the deeper the ECB has to delve in its unconventional policy toolkit, however, unpalatable various members of the ECB Governing Council might find those to be.
Asked if Yellen’s style of functioning as Fed chief would be different from Bernanke’s, if at all, since she tries to get everybody on board, Jeremy said it would be proper to differentiate her from (Alan) Greenspan, because that’s where the difference comes in.
Looking at the comments from Richard Fisher and talking about her being a consensus builder – that is important, particularly considering the changes, the voter rotation coming through next year with Fisher and Plosser coming on to the (FOMC) panel.
That has changed the potential dynamics a little bit, and through the consensus if she were to want to extend the QE program into the medium term, would become rather more difficult to pursue because of the opposition from the hawkish members, Jeremy concluded.
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