‘Setting the tone’ is an important part of a central bank’s toolkit. Just as with any type of communication, when members of the Fed speak-out, more often than not it is the way a point about the economy is expressed, than the point itself, which is remembered. Impact is more important than intent when you are setting the tone. I suspect that this week’s testimonies by Fed Chair Janet Yellen (in front of Senate Banking Committee and the House Financial Services Committee this Tuesday and Wednesday respectively) will be a good example of this rule.
Of course, the majority of Chair Yellen’s comments have already been telegraphed by last week’s minutes from the latest Federal Reserve meeting in June. The minutes suggested a new beginning for fiscal policy in the United States is in preparation, and that the events of this year have already, largely been packed away and put behind us. The Q1 decline in GDP of 2.9% on an annualised basis is a case in point – there was little reaction to it within the minutes. Likewise the dynamics between inflation and the jobs market were neutered and suppressed. We have had a payrolls announcement of 288,000 jobs in the meantime to upset the balance.
The Federal Open Markets Committee’s balancing act consists of acknowledging the improvements in the US jobs market, while using the low inflation environment and outlook as a counterweight to any near term hawkishness. The reiteration of the use of macro prudential tools as controls on potential bubble conditions instead of interest rates has also been seen as a dovish shift, although ably neutered by the confirmation of the imminent end of the Federal Reserve’s QE3 asset purchases plan in October.
We saw a similar tact employed by Bank of England Governor Mark Carney recently, in response to questions about the London property market. His comments triggered sterling buying while the dollar sold off on the Fed’s. It seems that the market that the former’s macro-prudential policies will fail in combating the London housing market’s rise and that there are no bubbles to speak of in the US.
The drip feed message coming out of the Fed communications is that policy is very data dependent and this week’s calendar will give us a better look at how well the US economy bounced back from that disastrous Q1 GDP announcement. We are looking for a strong GDP return figure for the months of April, May and June – currently tracking around 2.9% QoQ and tomorrow’s retail sales, Wednesday’s industrial production and Thursday’s housing starts announcements will send the measurement one way or the other.
There is cause to be optimistic on retail sales and housing starts following the recent improvements in consumer confidence, wages and a weather-related surge in home owner look through into construction. We could easily see a GDP readout on the 30th of above 3.0% on the quarter. That would show both impact and intent.