There are no surprises in the text of Janet Yellen's testimony this morning as she repeats that tapering will begin sometime this year and that a limited number of gradual rate hikes will extend over the next few years. Yellen said the long-run level for the balance sheet, now at $4.5 trillion, is still unknown and that the Fed does not intend to use unwinding as a policy tool. On rates, she said the neutral rate is "quite low" by historical standards and that the funds rate doesn't have far to go to hit a neutral stance for policy.
She repeated that inflation is being held down by unusual factors (cell phones, drugs and gasoline) and that uncertainty remains when inflation will respond to high levels of employment. Yellen also warned once again against using monetary tools in a "mechanical" way. On the economy, she said odds are 50-50 whether growth proves stronger or softer than expected and she gave an upgrade to the global economy, saying it has improved.
In questions and answers, Yellen said the FOMC intends to return to a Treasury-only portfolio following the unwinding of its $1.8 trillion in mortgage-backed securities holdings. Regarding the timing of when unwinding will begin, which is generally expected at either the September or December FOMC meetings, she would only add that it should be done "relatively soon." She did, however, offer an indication on how long the unwinding will take, saying she expects it to end around 2022. On rates, she said one more hike is likely this year. She also expressed commitment to achieving the Fed's 2 percent inflation target and attributed recent price weakness to special factors, factors she warned that will hold down inflation rates until they drop off. Yellen further noted that unemployment, current at 4.4 percent, is running below what the FOMC considers to be sustainable. On her own status, she said she hasn't given further thought on her own reappointment and conceded that this may be her last semi-annual testimony (her term as chair expires in early February next year).