Investors must watch what the Fed does, not what Yellen says

Too much rides on US Treasuries for investors just to take the Federal Reserve at its word. It is the Fed’s actions that matter. As the US central bank closes in on balance-sheet reduction, investors should not just assume everything will be alright.

Fed chairman Janet Yellen may have roiled markets last week with comments before Congress that traders interpreted as somewhat more dovish. But actions speak louder than words. US monetary policy tightening is ongoing.

And as the former Dallas Fed chief Richard Fisher said back in April, “since [the Second World War], the Fed has initiated 13 tightening cycles” and “10 of those 13 landed the [US] economy in recession”.

The US central bank has already implemented a number of rate rises and expects to begin shrinking its balance sheet. As for the running commentary, including Yellen’s testimony, it’s arguably just an attempt at crowd control aimed at ensuring the Fed sets the pace of policy tightening rather than the market.

Amid the tightening of monetary policy, US inflation still remains below the Fed’s 2 per cent target. Friday’s US consumer price index data showed just a rise of 1.6 per cent year on year in June, below May’s 1.9 per cent and the 1.7 per cent predicted by economists polled by Reuters.

But investors know that is not necessarily an impediment to tighter US monetary policy.