As the fourth quarter approaches, we are entering what should be the finalstretch of the selection process for a possible new Fed chair. Not surprisingly, thefrequency of both news stories on the subject and lists of potential candidatesemanating from somewhere near the White House has been on the rise of late.
Commentary for Wednesday: Fed Chair Yellen's semi-annual monetary policytestimony will be the main event today. Since Yellen will be speaking on behalf ofthe FOMC, her testimony should largely adhere to the June 14meeting statementand her post-meeting press conference remarks. We expect Yellen to present arelatively upbeat outlook and continue to guide market participants toward thecommencement of balance sheet normalization as well as another rate hikeby yearend. In our view, the Fed will most likely pause its rate hiking cycle atthe September 20meeting to announce the tapering of reinvestments, whichwould ostensibly begin in October. If there are no meaningful dislocations infinancial markets related to tapering and incoming data continue to support theCommittee's growth and inflation outlook, we expect the Fed to resume hikingat the December 13meeting.
The meeting statement and press conference message came across as expected.Reinvestment tapering will begin in October, and barring negative surprises, theCommittee is on track to raise rates one more time this year and still expects threehikes in 2018. Chair Yellen emphasized that the balance sheet tapering processthat has been set into motion will not be stopped or reversed unless the economytakes a significant hit and the fed funds target has had to be reduced back close tozero. There were a few interesting changes in the FOMC’s economic projections,and we came away from the press conference feeling that Yellen would accepta second term as chair if offered.
Four names have come up that warrant further attention. The first three of thesefour names featured prominently in a piece we put out seven months ago.1The first is Janet Yellen. She continues to be listed as someone the Presidentis seriously considering, and as we observed in a recent Fed note, her remarksat the September FOMC press conference came across to us as suggesting shewould happily accept reappointment.2 This outcome would clearly be the onewith least disruption to the markets – four more years of the Fed being led undervery effective Yellen stewardship.
With respect to the Fed's employment mandate, Yellen will be sure to highlightthat aggregate income growth implied from the most recent employment datawas solid last quarter and points to a robust rebound in Q2real GDP. Case inpoint, the payroll proxy for income, which takes the product of private payrolls,average hourly earnings and average weekly hours, was up 5.2% annualized lastquarter—the best performance since Q22014(5.4%). This is a key reason wecontinue to expect 2.8% real GDP growth in Q2and an even stronger 3% gainin the current quarter
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