Yellen review: Fed planning faster balance sheet run off?

The testimony isn’t as dovish as the initial headlines suggest. Yellen said rates are close to neutral… If so then the central bank could proceed to unwind its balance sheet at a faster rate.

Yellen explicitly said today that balance sheet run-off could begin this year… She also blamed recent dip in inflation to ‘a few unusual price declines in certain items’.

Clearly, the Fed intends to go on with balance sheet run off = reverse QE for markets. Dovish on talk on rates is weighing over the USD, but the rally in equities may not be sustained on reverse QE fears.

Fed doves will cheer today’s NFP & wage growth report

US economy added 222K jobs, unemployment rate ticked up to 4.4%, labor force participation rate rose to 62.8%, wage growth 2.5% y/y vs. 2.6% expected.
This is being widely called as a solid report. In a way it is. One could argue the improving economic conditions is forcing people to return to labor market. The strong NFP indicates there is still considerable slack in the labor market.
Meanwhile, wages remain weak… so consumer spending is likely to remain anemic + it also means low/weak inflation.
So the easy monetary policy is working = it is boosting labor pool, but isn’t boosting wage price inflation. So it makes sense to go slow with the rate hikes. Hence, I believe the USD could be sold against most majors except GBP and JPY.

Did Fed just warn about complacency in markets?

The key highlight of the Fed minutes – “financial conditions have eased despite the Fed rate hike”

So the Fed does expect a certain degree of tightening in the financial conditions. The fact that the Fed has taken note of the easing conditions suggests it is worried about the low volatility in the markets and the eventual risk sudden adjustment to liquidity tap going dry (balance sheet runoff).