Fed Funds Firm on Yellen’s Testimony

Fed funds futures rallied, in conjunction with Treasuries, on the dovish interpretation of Fed Chair Janet Yellen’s remark on adjusting policy if the inflation undershoot looks to persist (for now, the Fed still sees slowing inflation as transitory). Implied rates are now suggesting only about 44% risk for another tightening by year end, down from about 49% just ahead of the release of her written testimony at 8:30 ET.

The market had already pushed out the chance for a third tightening this year after the Fed outlined some of its balance sheet plans last month. Action Economics believes the Fed will start its balance sheet unwind in September or October, and will increase the funds rate another 25 bps in December given the positive outlook on growth and expectations that the Federal Open Market Committee will continue to see “idiosyncratic” elements pushing down price pressures.

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