Monday’ speech, last before news blackout, was initially seen as way to cement market expectations of hike
Federal Reserve Chairwoman Janet Yellen will have to convince a skeptical market the U.S. economy hasn’t taken a turn for the worse.
Only a few days ago, analysts thought Fed Chairwoman Janet Yellen would use her speech in Philadelphia on Monday to put the final explanation point on the U.S. central bank’s plan to hike interest rates on June 15.
Now, in the wake of the weak May jobs report, Yellen has a new role, damage control.
Rather than paving the way for an interest rate hike, the Fed chairwoman will likely use her speech in Philadelphia, due to start at 12:30 p.m. Eastern, to dampen speculation that the Fed will soon have to reverse course and seek new ways to stimulate the economy.
Grave doubts about the economy are bound to surface in the wake of the weak May payroll data, said Nathaniel Karp, director of economic research at BBVA Compass.
Job growth was the weakest in almost six years in May, well below market expectations. Downward revisions to the prior two months added to the grim picture.
In the wake of the data, Yellen’s goal will be to contain the negative reaction and keep it from “snowballing into other parts of the economy,” Karp said.
Negative views on the outlook can become self-fulfilling, especially if consumers decide to limit spending, he said.
Yellen must also “rein in the market reaction and bring it back to the underlying strategy,” which for the Fed is raising rate hikes twice this year, he said.
Experts agreed Yellen will stress that one sour note does not change the big picture. She will repeat her most recent comment that an interest rate increase would be appropriate “probably in coming months” if the economy and labor market continue to strengthen.
“It would be a mistake for her to markedly change her tone,” said Douglas Porter, chief economist at BMO Capital Markets.
This view “is still appropriate,” Porter said.
Carl Tannenbaum, chief economist at Northern Trust, said Yellen has the “opportunity to put the May job report in perspective, refine the time line and identify what factors will be most influential.”