US Dollar strengthened following US The Fed Chief Janet Yellen speeches to the Senate Banking Committee in Washington. EURUSD down 0.39% to 1.3566, while USDJPY up 0.15% to 101.70 and USDCHF up 0.47% to 0.8960. Here are brief details of what Yellen talked about.

US Dollar strengthened following US The Fed Chief Janet Yellen speeches to the Senate Banking Committee in Washington. EURUSD down 0.39% to 1.3566, while USDJPY up 0.15% to 101.70 and USDCHF up 0.47% to 0.8960. She did not actually says that the Fed is keen to hike interest rate soon, as she insinuated that the economy is giving mixed signal. However, the market perceived Fed readiness to hike rate if labor market improvement continues. Here are brief details of what Yellen talked about.

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US Economy Recovery Remains Patchy

Yellen report on the Congress basically talk about uncertainties surrounding US economy outlook, and that the Fed rate hike timing depends on how good the data will be in the upcoming periods. Three indicators is highlighted on the report, lead by the labor market, inflation, and GDP.

  1. The Fed have recorded recent labor market improvements, however they also noted that significant slack remains. The reason is that the improvements excluded broad indicators, such as labor force participation, hiring and quit rates, the number of people working part time for economic reasons, and wages growth.
  2. Inflation has moved up, but it is still lower than the expected 2% goal set by FOMC. Nevertheless, longer-term inflation expectations have remained stable.
  3. In regard of Q1 2014 disappointing GDP growth, Yellen said that it is transitory. Export declines weighed on Q1 2014 GDP, but increasing wealth and income are supporting consumer spending. They are looking for moderate growth, and expect GDP in Q2 2014 to rebound.

Weak improvements on the labor market broad indicator, particularly wage growth, recently have been spotted by Nobel-winner Joseph Stiglitz, in which he also applaud the Fed decision to keep rate at low level. The same sentiment echoed by Yellen on this report; the Fed intends to keep rate on the low for some time after QE ends.

Fed Rate Hike Depends On Data

In these circumstances, the Fed wants US economy to firm before interest rate hiked. On the other hand, if the economy worsens, then more stimulus is possible.

Quoted by Marketwatch, Yellen said, If the labor market continues to improve more quickly than anticipated by the Federal Open Market Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned. Furthermore, If economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated.

Stock Market Is Frothy

Unusually, Yellen revealed criticism targeted on the stock market. Due to the rising risk appetite on certain assets, the stock market is showing signs of bubble. In the report, the Fed specifically said that Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched, with ratios of prices to forward earnings remaining high relative to historical norms. Predictably, stocks in the sector have quickly dropped afterward.

The comment is not the first concern about US stock market spoken by the Fed officials. CNBC noted that William Dudley from New York Fed have mentioned biotech stocks in March, and Daniel Tarullo identified stretched valuations on some small tech companies stocks in February.


These comments lead us to think whether market bubble is already here and it is just waiting to burst. However, for now market concerns is still on when the Fed is going to hike rate. If the indicator is simply unemployment rate, then it may come soon within this year. But since the Fed under Yellen always check labor market broad indicators, it is possible that rate hike will still occur on the second half of next year as previously predicted.

Nevertheless, it is highly possible that the next unemployment report will put the US Dollar on precarious position. Any hint to the better broad indicators will drive the USD higher, while remaining slacks could drop it lower. Take care to observe Jobless Claims data on Thursday this week; hot on the heels of Yellen comments, it may prove to be really high impact.


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