Yesterday, the Fed Chair Janet Yellen delivered a semiannual congressional testimony on monetary policy in front of the House Financial Services Committee. What are the highlights of their speech and the monetary policy report?

Generally speaking, Yellen did not say anything new, as her testimony was largely a repeat of what we heard last week in Cleveland. The most important part for the markets was reiteration that economic conditions are likely to make it appropriate “at some point this year” to raise interest rates. We bet that it will not be September, because of the weak recent retail sales and remaining slack in the labor market. Additionally, given that the Fed generally gives rate hike notice the meeting before, there are only two weeks left to take a decision whether to hike in September, but Fed seems to be rather undecided (“we have no judgment at this point about the appropriate date to raise the federal funds rate”).

Even the question and answer session was quite boring, except the part when Yellen got a bit grilled about Fed leaks (oh, it’s not a big deal, just some confidential information from a Fed meeting ended up in a private investor newsletter before it was supposed to).

The more interesting was perhaps the sole monetary policy report, although it mostly repeats what we already know (GDP was weak, inflation remained below the target, while labor markets conditions improved, but the slack remained; and we have to hike some day, but we forgot how to do it). However, it pointed out that “the pace of output growth appears to have slowed so far this year, on average, relative to its pace last year” and that “labor market conditions continued to improve over the first half of 2015, although at a more moderate pace than last year”. The report emphasized also that the sole unemployment rate does not reflect the whole slack in the labor market and noted that productivity growth has been especially weak.

For us, the most important part is about private nonresidential fixed investment, which fell at an annual rate of 2 percent in the first quarter, reflecting a sizable decline in investment in the equipment and structures used in the drilling and mining sector. However, business outlays for structures outside of the energy sector also declined in the first quarter. It is not good predictor, since investments are the most important driver of the productivity and the whole economy. In this context, the July Empire State Manufacturing Survey looks really disappointing, as the new orders index was negative (-3.50) for the fourth time in five months.

To sum up, Yellen gave her semi-annual testimony before the Congress, which was a reiteration of the speech in Cleveland from the last week. The Q&A session was not groundbreaking, but the monetary policy report admitted the relative weakness of the economy (compared to previous year) and pointed out the decline in business investment, which is a bad news for the economy. The gold prices declined after Yellen repeated the U.S. central bank’s will to raise interest rates later this year. However, we hear about such plans for several months. The more delayed and gradual tightening cycle, the better for the gold prices.

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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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