Economist's Insights

Yellen’s Testimony: Economy Doing Well, Wages to Grow, Balance Sheet Normalization in 2017, Watching Inflation Closely

Jul 12, 2017

In her prepared remarks, Fed Chair Yellen signaled support for starting to slow portfolio reinvestments sometime in 2017. In the Q&A portion of her Senate testimony, she went further saying she supports starting that normalization process “relatively soon”. She expects that the Fed’s “methodical” description of the normalization plan to the public will allow it go smoothly. She’s unsure about the ultimate size of the portfolio but expects it to be comprised primarily of Treasurys. Yellen expects the economy will continue to grow and believes further tightening in the labor market will eventually boost wages. This should help inflation head towards the Fed’s 2% target on a sustainable basis. On inflation, she mentioned the couple of categories that have led the Fed to believe the recent weakness is transitory. But she did dovishly admit that the recent weakness in inflation is only “partly” due to those factors. After Yellen’s testimony, the story on the Fed is that there’s agreement on beginning balance sheet normalization this year but slightly greater concern over the recent weakening in inflation which could impact the rate path.